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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] 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 of incorporation) (I.R.S. Employer Identification Number)
300 SMITH STREET, FARMINGDALE, NEW YORK 11735
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 694-1800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
-------------- ---------------------
Class A Common Stock,
$1.00 par value The NASDAQ Stock Market
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the last sale price on March 24, 1997, was
approximately $9,802,758.
As of March 24, 1997, there were outstanding 2,928,867 shares of the
Registrant's Class A Common Stock, par value $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference information from the Registrant's
definitive Proxy Statement for the 1997 Annual Meeting of Stockholders.
P & F INDUSTRIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE
PART I ----
Item 1. Business 1 - 3
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 4
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 10
Item 8. Financial Statements and Supplementary Data 11 - 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 35
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management 35
Item 13. Certain Relationships and Related Transactions 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 36 - 41
Signatures 38
i
PART I
ITEM 1. BUSINESS
P & F Industries, Inc. (the "Company") conducts its business operations
through two wholly-owned subsidiaries. Florida Pneumatic Manufacturing
Corporation ("Florida Pneumatic") is engaged in the importation, manufacture and
sale of pneumatic hand tools, primarily for the industrial and retail markets,
and the manufacture and sale of 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. Embassy Industries, Inc.
("Embassy") is engaged in the manufacture and sale of baseboard and radiant
heating products. Embassy also imports, assembles and packages a line of small
hardware items through its Franklin Hardware division ("Franklin"). Note 11 of
the Notes to Consolidated Financial Statements presents financial information
for the segments of the Company's business.
Florida Pneumatic has two major customers, Sears, Roebuck and W.W.
Grainger, which accounted for 37.4%, 31.4% and 38.9% and 10.8%, 10.8% and 10.7%
of consolidated net sales for the years ended December 31, 1996, 1995 and 1994,
respectively.
FLORIDA PNEUMATIC
Florida Pneumatic imports or manufactures approximately fifty types of
pneumatic hand tools, most of which are sold at prices ranging from $50 to
$1,000, under the names "Florida Pneumatic", "Universal Tool" and "Fuji", as
well as under the trade names or trademarks of several private label customers.
These tools are similar in appearance and function to electric hand tools such
as sanders, grinders, drills, saws and impact wrenches but are powered by
compressed air, rather than directly by electricity. Air tools, as they are also
called, are generally less expensive to operate, offer better performance and
are lighter in weight than their electrical counterparts.
Most of Florida Pneumatic's sales are of pneumatic tools imported from
Japan, along with sales of some products imported from Taiwan and mainland
China. Florida Pneumatic manufactures high speed rotary and reciprocating
pneumatic tools at its factory in Jupiter, Florida and also manufactures and
imports air filters.
Products are sold to distributors, retailers and private label customers
through in-house sales personnel and manufacturers' representatives. Typical
users of Florida Pneumatic's hand tools include industrial maintenance and
production staffs, do-it-yourself mechanics, automobile mechanics and auto body
repairmen.
The primary competitive factors in the pneumatic tool market are price,
service and brand-name awareness.
1
Two customers accounted for 67.5% of Florida Pneumatic's net sales in
1996. Relationships with these customers remain excellent. The loss of a third
major customer in late 1995 had no significant impact on Florida Pneumatic's
earnings, because of increased sales to existing customers and reductions, begun
in early 1995, of related overhead and other costs.
Berkley markets a product line consisting of pipe and bolt dies, pipe
taps, pipe and tubing cutter wheels, wrenches and replacement electrical
components for a widely used brand of pipe cutting and threading machines.
Florida Pneumatic markets Berkley's products through industrial distributors and
contractors.
Florida Pneumatic's products are sold off the shelf and no material
backlog of orders exists. The business is not seasonal, but it may be subject to
significant periodic changes resulting from occasional sales promotions by
customers.
Florida Pneumatic purchases significant amounts of pneumatic tools from
two foreign suppliers. Other sources are available. However, the loss of either
supplier could cause a temporary disruption in the flow of products, possibly
creating an adverse effect on operating results.
EMBASSY
Embassy's baseboard heating products are sold nationally under the Embassy
name and under its Panel-Track and System 6 trademarks, for use in hot-water
heating systems installed in single family homes, multi-unit dwellings and
commercial and industrial buildings. Products are sold principally to
wholesalers by manufacturers' representatives and in-house sales support
personnel. Embassy's products are also sold to other manufacturers for
incorporation into their products and for distribution on a private label basis.
Hot-water heating systems operate by heating water in a boiler and
circulating it through the copper tubing in the baseboard along the perimeter of
the space to be heated. Attached to the copper tubing are numerous
closely-spaced aluminum fins which dissipate the heat. Sections are two to ten
feet in length, project several inches from the wall and rise less than a foot
from the floor. These sections may be combined for longer installations.
Embassy's baseboard contains patented plastic tracks which ease handling and
reduce operating noise.
At the end of 1994, Embassy introduced a hot-water radiant heating system.
Radiant heating systems are different from baseboard heating systems in that the
heating systems are generally installed in floors and radiate heat provided by
hot water circulating in plastic tubing installed beneath the surface of the
floor. These systems include the tubing, manifolds, controls and installation
supplies. Embassy also provides computer software which aids in the design of
the system. Sales of this product accounted for 10.3% of Embassy's total heating
equipment sales in 1996.
2
Baseboard and radiant heating systems compete with forced hot-air and
electric heat systems. Electric systems are generally more expensive to operate.
Forced hot-air systems are noisier, sometimes cause discomfort from fluctuations
in temperature as the furnace cycles on and off and do not distribute warm air
uniformly within the room. Hot-water systems are generally more expensive to
install. Accordingly, baseboard and radiant heating systems are more widely used
in custom and higher priced homes and in colder sections of the country. Since
Embassy's products are primarily used in new installations, its sales are
related to new housing starts.
Embassy's baseboard heating products are sold off the shelf and no
material backlog of orders exists. Raw materials are readily available. The
business is seasonal, with approximately 61.0% of Embassy's heating equipment
sales coming in the last six months of the year.
The primary competitive factors in the baseboard and radiant heating
market are quality, price, service and brand-name awareness.
The Franklin division of Embassy imports, assembles and packages
approximately 135 types of hardware products, including door knobs, locks, door
viewers, hinges, clothesline pulleys, rope tighteners and fire escape ladders.
Products generally range in price from under $1.00 to $30.00 and are sold to
retailers, wholesalers and private label accounts through manufacturers'
representatives and in-house sales support personnel. Nearly all of Franklin's
sales are of products imported from the Far East. Three customers accounted for
approximately 51.4% of Franklin's sales in 1996, with each doing approximately
the same volume.
The primary competitive factors in the hardware business are price,
service, skill in packaging and point-of-sale marketing.
Franklin's products are sold off the shelf and no material backlog of
orders exists. Sources of imported products are readily available.
Franklin's business is not seasonal.
EMPLOYEES
The Company employed approximately 168 persons as of December 31, 1996,
including 4 at corporate headquarters. The 80 employees of the pneumatic tool
operation are not represented by a union. Of the 84 persons employed in the
heating equipment and hardware operations, 59 factory workers are covered by a
single-employer union contract. The heating equipment union contract expires on
November 30, 1998. The Company believes that its relations with its employees
are satisfactory.
3
Item 2. PROPERTIES
Embassy and Florida Pneumatic each own, subject to a mortgage, the plant
facilities which they occupy. Embassy's 75,000 square foot plant facility,
located in Farmingdale, New York, is currently being utilized at nearly full
capacity. Florida Pneumatic's 72,000 square foot plant facility, located in
Jupiter, Florida, provides adequate space for its operations in the foreseeable
future. The Company's executive offices are located in Embassy's facility in
Farmingdale, New York.
The Company owns, subject to a mortgage, a 36,000 square foot facility in
New Hyde Park, New York. This building is being leased to Triangle Sheet Metal
Works, Inc. ("Triangle"), the Company's former subsidiary.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the period covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock trades on the Nasdaq Stock Market. The
price range of the Company's Class A Common Stock during the last two fiscal
years was as follows:
1996 HIGH LOW
---- ---- ---
First Quarter $ 3 1/8 $ 2 3/8
Second Quarter 3 1/2 2 5/8
Third Quarter 3 9/16 2 9/16
Fourth Quarter 4 1/8 3 1/8
1995 HIGH LOW
---- ---- ---
First Quarter $ 2 3/8 $ 1 15/16
Second Quarter 2 1/2 2 3/16
Third Quarter 2 1/2 2 1/4
Fourth Quarter 2 3/4 2 3/8
As of March 21, 1997, there were approximately 3,800 holders of record of
the Company's Class A Common Stock.
The Company has not declared any cash dividends on its Class A Common
Stock since its incorporation in 1962 and has no plans to declare any cash
dividends in the immediate future. At December 31, 1996, the Company had 263,345
shares of $1 Cumulative Preferred Stock outstanding. All dividends on the
preferred stock have been paid to date. On January 30, 1997, the Company
redeemed all of the outstanding shares of the preferred stock at the par value
of $10 per share.
4
ITEM 6. SELECTED FINANCIAL DATA
P & F INDUSTRIES, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
=======================================
The following selected consolidated financial data has been derived from
the audited consolidated financial statements of P & F Industries, Inc. and
subsidiaries. The selected financial data should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this
Form 10-K.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Net sales $42 650 342 $42 645 954 $44 842 790 $40 355 311 $34 468 741
=========== =========== =========== =========== ===========
Income from continuing operations $ 1 953 287 $ 1 491 975 $ 1 233 356 $ 695 866 $ 320 927
=========== =========== =========== =========== ===========
Income from continuing operations
per share of common stock:
Primary $ .52 $ .38 $ .30 $ .19 $ .04
=========== =========== =========== =========== ===========
Fully diluted $ .51 $ .38 $ .30 $ .19 $ .04
=========== =========== =========== =========== ===========
Total assets $31 331 643 $35 415 672 $33 013 300 $35 899 164 $35 555 176
=========== =========== =========== =========== ===========
Long-term obligations $ 5 288 570 $ 7 414 181 $ 7 767 625 $ 8 208 245 $ 8 469 386
=========== =========== =========== =========== ===========
Cash dividends declared per
common share $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Consolidated revenues were virtually unchanged, with an increase of less
than 1%, from $43,047,601 to $43,078,371. Revenues from pneumatic tools and
related equipment decreased 3.6%, from $31,989,783 to $30,836,616. The decrease
in these revenues was caused by the loss in late 1995 of one large customer, to
whom sales were approximately $1,688,000 in 1995, and by the one-time sale to a
new customer of approximately $2,337,000 in the fourth quarter of 1995.
Approximately 71% of the decrease in these revenues was offset by higher sales
to existing and new customers. Selling prices were approximately 1.3% higher in
1996 than in 1995.
Heating equipment revenues increased 8.5%, from $7,530,770 to $8,171,330.
Approximately half of the increase was due to increased sales of radiant heating
products. The balance was due to increased baseboard sales, aided by a 2%
increase in selling prices.
Hardware revenues increased 14.2%, from $3,531,783 to $4,033,686, due to
increased sales to existing customers. Hardware selling prices were unchanged
during the year.
Consolidated gross profit, as a percentage of revenues, increased from
32.6% to 33.4%. Gross profit on pneumatic tools and related equipment increased
from 32.6% to 33.8%, due to the increased selling prices and a more favorable
exchange rate of the dollar compared to the Japanese yen, which reduced the cost
of imported product. These improvements in gross profit were partially offset by
a less favorable product mix. Gross profit from heating equipment increased
slightly, from 34.2% to 34.7%. Higher selling prices essentially offset higher
material costs. Gross profit from hardware decreased from 29.4% to 26.7%, due to
a less favorable product mix.
Consolidated selling, general and administrative expenses decreased 2.2%,
from $10,056,193 to $9,839,977. Of the total decrease, $163,200 was attributable
to a charge against operations in 1995 for the amount paid for the cancellation
of options to purchase 192,000 shares of common stock. As a percentage of
revenues, selling, general and administrative expenses decreased from 23.4% to
22.8%.
Interest expense decreased 26.2%, from $1,021,400 to $754,069, due to a
decrease in average loans outstanding.
The effective tax rates for the years ended December 31, 1996 and 1995
were 38.7% and 36.4%, respectively. See Note 8 of the Notes to Consolidated
Financial Statements.
6
1995 COMPARED TO 1994
Consolidated revenues decreased 4.5%, from $45,075,182 to $43,047,601,
including a decrease of $2,129,585 in revenues from hydraulic equipment. In late
1994, the nature of the transactions regarding the import and sale of hydraulic
equipment changed, and the Company no longer takes title to the equipment at any
time during the transaction. Prior to this change, the gross amounts of these
transactions were recorded as sales, with corresponding cost of sales. After the
change, the net amounts of these transactions were recorded as commission
income.
Excluding revenues from hydraulic equipment, revenues were essentially
unchanged. Revenues from pneumatic tools and related equipment, excluding
hydraulic equipment, decreased 1.7%, from $32,161,693 to $31,604,779, despite
increases of approximately 3.5% in average selling prices. The decrease in these
revenues was caused primarily by the loss in late 1995 of one large customer, to
whom sales were approximately $2,880,000 in 1994 and approximately $1,688,000 in
1995, and by a reduction of approximately $2,303,000 in one-time sales for
special promotions by customers. These decreases in revenues were partially
offset by a one-time sale of approximately $2,337,000 to a new customer.
Revenues from heating equipment increased 5.7%, from $7,126,217 to $7,530,770.
This increase resulted from the first full year of sales of radiant heating
products, recently developed by the Company, and from approximately 5% higher
average selling prices. These increases more than offset a 3.1% decrease of unit
sales. Revenues from hardware were strong, increasing by 6.4%, from $3,319,101
to $3,531,783.
Consolidated gross profit, as a percentage of revenues, excluding revenues
from hydraulic equipment, increased from 30.2% to 32.6%. Gross profit from
pneumatic tools and related equipment, excluding hydraulic equipment, increased
from 30.7% to 31.8%. This was primarily due to a more profitable product mix of
sales. The decline in the value of the dollar as compared to the Japanese yen
caused a significant increase in the cost of tools imported from Japan. This
increase was offset by the selling price increase described above, by purchase
price reductions from the suppliers of the imported tools and by lower prices on
purchases from alternative suppliers. Gross profit from heating equipment
decreased from 35.4% to 34.3%, because of higher material costs and a less
profitable product mix. Gross profit from hardware increased from 28.2% to
29.4%, due to increased sales volume and a more favorable product mix.
Consolidated selling, administrative and general expenses increased less
than 1%, from $9,973,728 to $10,056,193, and were virtually unchanged as a
percentage of revenues, excluding revenues from hydraulic equipment.
The effective tax rates for the years ended December 31, 1995 and 1994
were 36.4% and 38.7%, respectively. See Note 8 of the Notes to Consolidated
Financial Statements.
7
LIQUIDITY AND CAPITAL RESOURCES
The Company gauges its liquidity and financial stability by the
measurements shown in the following table:
DECEMBER 31,
------------------------------
1996 1995 1994
---- ---- ----
(amounts in thousands, except for ratios)
Working Capital $15,682 $15,838 $14,940
Current Ratio 3.35 to 1 2.54 to 1 2.70 to 1
Shareholders' Equity $19,382 $17,692 $16,463
During 1996, accounts receivable decreased by $2,990,170. This decrease
was the result of the collection of the unusually high level of accounts
receivable at December 31, 1995, including approximately $2,337,000 from
one-time sales to a customer in December 1995. Also during 1996, inventories
decreased $3,783,711. The funds provided by these decreases in accounts
receivable and inventories were used to pay down all of the Company's short-term
borrowings during the year. This decrease in short-term borrowings of $4,233,753
contributed to the increase in the Company's current ratio.
During 1995, accounts receivable increased by $841,863 as a result of
greater sales volume in the month of December 1995. Also during 1995,
inventories increased $1,827,338, because of changes in sales product mix. The
relatively long lead times in the purchasing cycle often result in delays in
reacting to changes in the product mix of sales.
The Company owns, subject to a mortgage, a 36,000 square foot facility in
New Hyde Park, New York. This building is currently being leased to a former
subsidiary of the Company. The lease expires on October 31, 1997. The tenant has
an option, which expires on June 23, 1997, to purchase the facility for the
amount outstanding on the mortgage. If this option is not exercised, the Company
intends to sell the facility at the end of the lease. A final mortgage payment
of approximately $1,740,000 is due in November 1997. The balance outstanding at
December 31, 1996 on this mortgage, $1,769,239, has been classified as a current
liability.
The Company's credit facilities provide a line of credit totalling
$18,000,000. Of this amount, $14,000,000 is available for direct loans, letters
of credit and bankers' acceptances. At December 31, 1996, there were no loans
outstanding against this line of credit. There was a commitment at December 31,
1996 of approximately $1,615,000 for as yet unused letters of credit. In
addition, at December 31, 1996, approximately $815,000 of the Company's credit
facility was used to secure accounts payable. The total line of credit also
includes $4,000,000 earmarked for acquisitions subject to the lending bank's
approval. The Company's credit facilities also provide 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
December 31, 1996 was approximately $1,610,000.
8
The Company's credit facilities agreement is subject to annual review by
the lending bank. Under this agreement, the Company is required to adhere to
certain financial covenants. At December 31, 1996, and for the year then ended,
the Company satisfied all of these covenants.
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. Because of these steps
taken by the Company, foreign currency exchange rate fluctuations have not had a
significant negative effect on the Company's results of operations or its
financial position. Any future weakness of the dollar would again, however,
present a problem and there can be no certainty that the Company will continue
to be successful in its efforts to counter this problem.
Capital spending was approximately $278,000, $403,000 and $212,000 in
1996, 1995 and 1994, respectively. The total amount in each year was provided
from working capital. Capital expenditures for 1997 are expected to total
approximately $835,000, some of which may be financed. Included in this amount
are expenditures relating to new products as well as expenditures relating to
the replacement or upgrading of old equipment.
On January 30, 1997, the Company redeemed all of its outstanding preferred
stock at the par value of $10 per share. The funds used for this redemption,
totalling $2,633,450, were derived from working capital.
On March 31, 1995, Florida Pneumatic purchased the assets and business of
Intech Industries, Inc. ("Intech") for cash totalling $206,000. Intech is a
domestic manufacturer and importer of air filters used on air compressors. The
operations of Intech have been merged with the operations of Florida Pneumatic.
On February 15, 1995, Florida Pneumatic purchased the assets and business
of Tradesman Tool Co., Inc. ("Tradesman") for cash totalling approximately
$547,000. Tradesman is a domestic manufacturer of heavy-duty pipe wrenches. The
operations of Tradesman have been merged with the operations of Florida
Pneumatic.
On August 23, 1994, the Board of Directors of the Company authorized the
redemption, effective September 6, 1994, of all outstanding rights issued under
a shareholder rights plan established in 1989 and also declared a dividend
distribution of new rights under a new shareholder rights plan. The redemption
price of $.01 per right resulted in an aggregate payment of $29,289, which was
treated as a dividend for tax purposes. In addition, the Company incurred
approximately $150,000 in costs associated with these transactions. These
amounts were charged against operations in 1994.
9
In June 1994, substantially all of the net assets of Triangle were sold
for $3,500,000 in cash to an investment group which included Triangle's senior
management. The divestiture of Triangle was in line with the Company's
previously stated goal of disengaging itself from the volatility of the
construction industry. The proceeds from the sale were used to reduce short-term
borrowings. The Company intends to reborrow these funds, when necessary, to fund
an acquisition. The Company is currently leasing its facilities in New Hyde
Park, New York to its former subsidiary.
The Company continues to conduct an extensive acquisition search. The
funds for an acquisition will be provided by working capital and existing credit
facilities, including the $4,000,000 credit facility earmarked for acquisitions
referred to above. The total funds available, including cash derived from
operations, will be approximately $9,000,000.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which is effective for fiscal years
ending after December 15, 1997. The Company will adopt Statement No. 128 for the
year ended December 31, 1997. Note 14 of the Notes to Consolidated Financial
Statements presents the pro forma effects of the adoption of Statement No. 128
for the year ended December 31, 1996.
10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
P & F INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
PAGE
----
Report of Independent Certified Public Accountants 12
Consolidated Balance Sheets as of December 31, 1996
and 1995 13 - 14
Consolidated Statements of Income for each of
the three years ended December 31, 1996, 1995
and 1994 15
Consolidated Statements of Shareholders' Equity for
each of the three years ended December 31, 1996,
1995 and 1994 16
Consolidated Statements of Cash Flows for each of
the three years ended December 31, 1996,
1995 and 1994 17 - 18
Notes to Consolidated Financial Statements 19 - 34
Schedule II - Valuation and Qualifying Accounts for
each of the three years ended December 31, 1996,
1995 and 1994 37
11
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and the Shareholders of
P & F Industries, Inc.
Farmingdale, New York
We have audited the accompanying consolidated balance sheets of P & F
Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. We have also
audited the schedule listed in the accompanying index. These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of P & F Industries,
Inc. and subsidiaries at December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 27, 1997
12
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=======================================
DECEMBER 31,
---------------------------
ASSETS 1996 1995
------------ ------------
CURRENT:
Cash $ 4 558 135 $ 1 224 603
Accounts receivable, less allowance
for uncollectibles of $370,410 and
$350,684 (Note 3) 6 113 259 9 163 246
Inventories (Notes 2 and 3) 11 119 850 14 903 561
Deferred income taxes (Note 8) 211 000 154 000
Prepaid expenses and other assets 300 850 367 988
Note receivable from officer 40 000 65 000
------------ ------------
TOTAL CURRENT ASSETS 22 343 094 25 878 398
------------ ------------
PROPERTY AND EQUIPMENT (Notes 3 and 4):
Land 993 020 993 020
Buildings and improvements 4 505 889 4 505 889
Machinery and equipment 5 246 699 5 394 134
------------ ------------
10 745 608 10 893 043
Less accumulated depreciation
and amortization 4 965 956 4 760 074
------------ ------------
NET PROPERTY AND EQUIPMENT 5 779 652 6 132 969
------------ ------------
DEFERRED INCOME TAXES (Note 8) 175 000 269 000
------------ ------------
GOODWILL, net of accumulated amortization
of $927,334 in 1996 and $828,946 in 1995 2 886 433 2 984 821
------------ ------------
OTHER ASSETS, net of accumulated
amortization of $34,659 in 1996
and $518,663 in 1995 147 464 150 484
------------ ------------
$ 31 331 643 $ 35 415 672
============ ============
See accompanying summary of accounting policies and notes to
consolidated financial statements.
13
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=======================================
DECEMBER 31,
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ ------------
CURRENT LIABILITIES:
Short-term borrowings (Note 3) $ -- $ 4 233 753
Accounts payable 2 661 589 3 499 174
Accruals:
Compensation 1 069 564 983 088
Other 1 012 467 1 239 782
Current maturities of long-term
debt (Note 4) 1 917 691 353 874
------------ ------------
TOTAL CURRENT LIABILITIES 6 661 311 10 309 671
LONG-TERM DEBT, less current
maturities (Note 4) 3 919 370 6 044 981
SUBORDINATED DEBENTURES (Note 5) 1 369 200 1 369 200
------------ ------------
TOTAL LIABILITIES 11 949 881 17 723 852
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 10)
SHAREHOLDERS' EQUITY (Notes 6 and 7):
Preferred stock, $10 par, cumulative;
shares authorized 2,000,000; issued
and outstanding 263,345 2 633 450 2 633 450
Common stock:
Class A - $1 par; shares authorized
7,000,000; outstanding 2,928,867 2 928 867 2 928 867
Class B - $1 par; shares authorized
2,000,000 -- --
Additional paid-in capital 7 607 614 7 607 614
Retained earnings 6 211 831 4 521 889
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 19 381 762 17 691 820
------------ ------------
$ 31 331 643 $ 35 415 672
============ ============
See accompanying summary of accounting policies and notes to
consolidated financial statements.
14
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
=======================================
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
REVENUES (Note 11):
Net sales $ 42 650 342 $ 42 645 954 $ 44 842 790
Other 428 029 401 647 232 392
------------ ------------ ------------
43 078 371 43 047 601 45 075 182
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 28 698 300 29 015 050 31 446 604
Selling, administrative
and general 9 839 976 10 056 193 9 973 728
Interest - net 754 069 1 021 400 1 060 305
Depreciation 598 739 608 983 583 189
------------ ------------ ------------
39 891 084 40 701 626 43 063 826
------------ ------------ ------------
INCOME BEFORE TAXES ON INCOME 3 187 287 2 345 975 2 011 356
TAXES ON INCOME (Note 8) 1 234 000 854 000 778 000
------------ ------------ ------------
NET INCOME $ 1 953 287 $ 1 491 975 $ 1 233 356
============ ============ ============
PREFERRED DIVIDENDS $ 263 345 $ 263 345 $ 263 345
============ ============ ============
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS $ 1 689 942 $ 1 228 630 $ 970 011
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
AND COMMON SHARE EQUIVALENTS:
PRIMARY 3 240 419 3 312 635 3 253 149
========= ========= =========
FULLY DILUTED 3 334 205 3 312 280 2 253 965
========= ========= =========
EARNINGS PER SHARE OF COMMON STOCK:
PRIMARY $ .52 $ .38 $ .30
====== ====== ======
FULLY DILUTED $ .51 $ .38 $ .30
====== ====== ======
See accompanying summary of accounting policies and notes to
consolidated financial statements.
15
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
===============================================
PREFERRED STOCK, CLASS A COMMON
$10 PAR - CUMULATIVE STOCK - $1 PAR ADDITIONAL
YEARS ENDED DECEMBER 31, -------------------- ---------------------- PAID-IN RETAINED
1994, 1995 AND 1996 SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
- ------------------------ ------- ----------- --------- ----------- ----------- -----------
BALANCE, January 1, 1994 263 345 $ 2 633 450 2 928 867 $ 2 928 867 $ 7 607 614 $ 2 352 537
Net income for the year ended
December 31, 1994 -- -- -- -- -- 1 233 356
Redemption of shareholders' rights -- -- -- -- -- (29 289)
Dividends on preferred stock -- -- -- -- -- (263 345)
------- ----------- --------- ----------- ----------- -----------
BALANCE, December 31, 1994 263 345 2 633 450 2 928 867 2 928 867 7 607 614 3 293 259
Net income for the year ended
December 31, 1995 -- -- -- -- -- 1 491 975
Dividends on preferred stock -- -- -- -- -- (263 345)
------- ----------- --------- ----------- ----------- -----------
BALANCE, December 31, 1995 263 345 2 633 450 2 928 867 2 928 867 7 607 614 4 521 889
Net income for the year ended
December 31, 1996 -- -- -- -- -- 1 953 287
Dividends on preferred stock -- -- -- -- -- (263 345)
------- ----------- --------- ----------- ----------- -----------
BALANCE, December 31, 1996 263 345 $ 2 633 450 2 928 867 $ 2 928 867 $ 7 607 614 $ 6 211 831
======= =========== ========= =========== =========== ===========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
16
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=======================================
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1 953 287 $ 1 491 975 $ 1 233 356
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 771 553 889 305 822 476
Provision for losses on
accounts receivable 59 817 77 307 99 996
Deferred income taxes 37 000 341 000 722 000
Loss (gain) on disposal
of fixed assets 3 446 (12 100) (2 000)
Decrease (increase):
Accounts receivable 2 990 170 (841 863) (1 411 817)
Inventories 3 783 711 (1 827 338) (562 080)
Prepayments and other items 86 634 254 654 (293 849)
Net assets of discontinued operation -- -- (577 746)
Other assets (36 676) 12 425 (99 030)
Increase (decrease):
Accounts payable (837 585) 546 691 (4 639 267)
Accruals (140 839) 251 672 355 870
----------- ----------- -----------
Total adjustments 6 717 231 (308 247) (5 585 447)
----------- ----------- -----------
Net cash provided by
(used in) operating
activities 8 670 518 1 183 728 (4 352 091)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment -- 12 300 3 000
Capital expenditures (278 094) (402 403) (212 254)
Proceeds from sale of discontinued
operation -- -- 3 500 000
Purchase of assets of Tradesman
Tool Co., Inc. and Intech
Industries, Inc. -- (752 959) --
----------- ----------- -----------
Net cash (used in)
provided by investing
activities (278 094) (1 143 062) 3 290 746
----------- ----------- -----------
See accompanying summary of accounting policies and notes
to consolidated financial statements.
17
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
=======================================
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 12 661 696 16 310 783 19 292 591
Repayments of short-term borrowings (16 895 449) (15 591 320) (18 110 764)
Proceeds from mortgage 2 062 500 -- 2 343 400
Principal payments on long-term debt (2 624 294) (344 084) (3 068 416)
Dividends paid on preferred stock (263 345) (263 345) (263 345)
Redemption of shareholders' rights -- -- (29 289)
----------- ----------- -----------
Net cash (used in)
provided by financing
activities (5 058 892) 112 034 164 177
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 3 333 532 152 700 (897 168)
CASH AT BEGINNING OF YEAR 1 224 603 1 071 903 1 969 071
----------- ----------- -----------
CASH AT END OF YEAR $ 4 558 135 $ 1 224 603 $ 1 071 903
=========== =========== ===========
See accompanying summary of accounting policies and notes
to consolidated financial statements.
18
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements contained herein include the
accounts of P & F Industries, Inc. and its subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated.
The Company conducts its business operations through two wholly-owned
subsidiaries. Florida Pneumatic Manufacturing Corporation ("Florida Pneumatic")
is engaged in the importation, manufacture and sale of pneumatic hand tools,
primarily for the industrial and retail markets, and the manufacture and sale of
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. Embassy Industries, Inc. ("Embassy") is engaged in the
manufacture and sale of baseboard and radiant heating products. Embassy also
imports, assembles and packages a line of small hardware items through its
Franklin Hardware division ("Franklin"). Note 11 of the Notes to Consolidated
Financial Statements presents financial information for the segments of the
Company's business.
BASIS OF FINANCIAL STATEMENT PRESENTATION
In preparing financial statements in conformity with generally accepted
accounting principles, 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.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and
short-term debt, approximated fair value as of December 31, 1996 and 1995,
because of the relatively short-term maturity of these instruments. The carrying
value of long-term debt, including the current portion, approximated fair value
as of December 31, 1996 and 1995, based upon quoted market prices for the same
or similar debt issues.
At December 31, 1996, the Company had foreign currency forward
contracts, maturing in 1997, to purchase approximately $1,610,000 in Japanese
yen at contracted forward rates.
The Company enters into foreign currency forward contracts as a hedge
against foreign accounts payable. At December 31, 1996, gains and losses on such
contracts were included in the measurement of the related foreign currency
transactions and reflected in the cost of sales. The Company does not hold or
issue financial instruments for trading purposes.
19
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (continued)
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out method.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost.
Depreciation is computed by the straight-line method for financial
reporting and by the straight-line and accelerated methods for income tax
purposes. The estimated useful lives for financial reporting purposes are as
follows:
Buildings and improvements 10 - 30 years
Machinery and equipment 3 - 12 years
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", which is effective for
fiscal years beginning after December 31, 1995, with earlier application
encouraged. The Company adopted Statement No. 121 for the year ended
December 31, 1995. The adoption of Statement No. 121 did not have a
material effect on the consolidated financial statements.
GOODWILL
The excess of the purchase price over fair value of net assets of acquired
businesses arises from business combinations accounted for as purchases and is
amortized on a straight-line basis over 40 years.
The Company's operational policy for the assessment and measurement of any
impairment in the value of excess of cost over net assets acquired which is
other than temporary is to evaluate the recoverability and remaining life of its
goodwill and determine whether the goodwill should be completely or partially
written off or the amortization period accelerated. The Company will recognize
an impairment of goodwill if undiscounted estimated future operating cash flows
of the acquired businesses are determined to be less than the carrying amount of
goodwill. If the Company determines that goodwill has been impaired, the
measurement of the impairment will be equal to the excess of the carrying amount
of the goodwill over the amount of the undiscounted estimated operating cash
flows. If an impairment of goodwill were to occur, the Company would reflect the
impairment through a reduction in the carrying value of goodwill.
20
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
=========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (continued)
TAXES ON INCOME
P & F Industries, Inc. and its subsidiaries file a consolidated Federal
tax return and separate state and local tax returns.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of any
change in the tax rate is recognized in income in the period that includes the
enactment date of such change.
EARNINGS PER SHARE
Primary and fully diluted earnings per share are computed using the
treasury stock method. Under this method, the aggregate number of shares
outstanding reflects the assumed use of proceeds from the hypothetical exercise
of the outstanding options and warrants to repurchase shares of common stock.
In calculating the purchase price of common stock, the average market
value for the period is used for primary earnings per share and the greater of
the average or ending market value for the period is used for fully diluted
earnings per share.
Net income or loss is adjusted for preferred dividends in computing the
net income or loss attributable to the common stock.
21
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 2 - INVENTORIES
Inventories consist of:
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
Raw materials $ 2 722 309 $ 3 476 355
Work-in-process 735 792 423 114
Finished goods 7 661 749 11 004 092
------------ ------------
$ 11 119 850 $ 14 903 561
============ ============
NOTE 3 - SHORT-TERM BORROWINGS
The Company's credit facilities provide a line of credit totalling
$18,000,000. Of this amount, $14,000,000 is available for direct loans, letters
of credit and bankers' acceptances. At December 31, 1996, there were no loans
outstanding against this line of credit. There was a commitment at December 31,
1996 of approximately $1,615,000 for as yet unused letters of credit. In
addition, at December 31, 1996, approximately $815,000 of the Company's credit
facility was used to secure accounts payable. The total line of credit also
includes $4,000,000 earmarked for acquisitions subject to the lending bank's
approval. The Company's credit facilities also provide 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
December 31, 1996 was approximately $1,610,000.
Borrowings under the Company's line of credit bear interest at
approximately the prime rate and are secured by the accounts receivable,
inventory and equipment of the Company. These borrowings are also
crossguaranteed by the parent company and each of the subsidiaries.
The Company's credit facilities agreement is subject to annual review by
the lending bank. Under this agreement, the Company is required to adhere to
certain financial covenants. At December 31, 1996, and for the year then ended,
the Company satisfied all of these covenants.
22
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
Mortgage loan - $9,095 payable monthly
(plus interest at 1/2% above prime)
through February 1999, when a final
payment of approximately $1,798,000
is due. (a)(b) $ 2 034 170 $ 2 152 405
Mortgage loan - variable amounts payable
monthly (including interest at a
variable rate) through May 2006, when a
payment of the entire balance of
unpaid principal
and interest is due. (a)(c) 2 033 652 --
Mortgage loan - paid April 1996. (d) -- 2 216 650
Mortgage loan - $18,143 payable monthly
(including interest at 10.65% per annum)
through October 1997, when a final payment
of approximately $1,740,000 is due. (a) 1 769 239 1 796 913
Term loan - paid December 1996. (e) -- 232 887
----------- -----------
5 837 061 6 398 855
Less current maturities 1 917 691 353 874
----------- -----------
$ 3 919 370 $ 6 044 981
=========== ===========
- ----------
(a) These mortgages payable relate to the land and buildings of the Company's
subsidiaries. Property with a net book value of approximately $3,860,000
is pledged as collateral.
(b) The prime interest rate at December 31, 1996 was 8.25%.
(c) Payments of $17,149 are due monthly on this mortgage through May 1997.
Payments thereafter will be recomputed annually and will be based on the
variable interest rate then in effect. The mortgagee has certain
privileges through June 1998 to convert the variable rate of interest to a
fixed rate.
(d) This mortgage was refinanced in April 1996.
(e) The original maturity date of this loan was October 1998. The balance of
this loan was prepaid in December 1996.
The aggregate amounts of the long-term debt scheduled to mature in each of
the years ended December 31, are as follows: 1997 - $1,917,691; 1998 - $158,752;
1999 - $1,869,577; 2000 - $58,097; 2001 - $62,869; 2002 and thereafter -
$1,770,075.
23
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 5 - SUBORDINATED DEBENTURES
The Company's 13.75% Subordinated Debentures are unsecured general
obligations of the Company and are subordinate to all existing and future senior
indebtedness of the Company. Interest on the Debentures is payable in arrears
semi-annually. The Company has the option to redeem the Debentures, at the
principal amount, at any time prior to the fixed due date of January 1, 2017.
NOTE 6 - CAPITAL STOCK TRANSACTIONS
The Company's preferred stock paid quarterly dividends of 10% per annum.
On January 30, 1997, the Company redeemed all of the outstanding shares of the
preferred stock at the par value of $10 per share.
On September 8, 1994, the Company redeemed, for $.01 per Right, the Rights
issued in connection with an existing Stockholder Rights Plan and pursuant to a
Rights Agreement, which had been adopted on June 8, 1989 and amended on January
17, 1991. The total amount paid was $29,289.
In connection with a new Stockholder Rights Plan, the Company entered into
a new Rights Agreement on August 23, 1994 and distributed as a dividend to each
holder of Class A Common Stock a preferred stock purchase right. These rights
entitle the stockholders, in certain circumstances, to purchase one
one-thousandth of a share of the Company's Series A Junior Participating
Preferred Stock for $10. The Stockholder Rights Plan is intended to protect,
among other things, the interests of the Company's stockholders in the event the
Company is confronted with coercive or unfair takeover tactics. The Company
incurred approximately $150,000 in costs associated with these transactions.
These amounts were charged to expense in 1994.
NOTE 7 - STOCK OPTIONS AND WARRANTS
In 1992, the Company adopted an incentive stock option plan (as amended)
which authorizes the issuance, to employees and directors, of options to
purchase a maximum of 1,100,000 shares of Class A Common Stock. These options
must be issued within ten years of the effective date of the plan and are
exercisable for a ten year period from the date of grant at prices not less than
100% of the market value of the common stock on the date the option is granted.
Options granted to any 10% shareholder are exercisable for a five year period
from the date of the grant at prices not less than 110% of the market value of
the common stock on the date the option is granted.
The Company applies the Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees", and related Interpretations in
accounting for the incentive stock option plan. Under APB Opinion 25, no
compensation cost is recognized if the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of the
grant.
24
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 7 - STOCK OPTIONS AND WARRANTS (continued)
Statement No. 123 of the Financial Accounting Standards Board, "Accounting
for Stock-Based Compensation", which is effective for transactions entered into
after December 15, 1995, requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's stock option plan had been determined in accordance with the fair
value method prescribed by Statement No. 123. The Company estimates the fair
value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1995: no dividends paid for all years; expected volatility of 40.0%;
risk-free interest rate of 5.5%; and an expected life of 4.0 years.
The effect of the adoption of the accounting provisions of Statement No.
123 on the Company's net income and earnings per share was not material.
The following table contains information on stock options for the three
years ended December 31, 1996:
Exercise Weighted
price average
Option range exercise
shares per share price
--------------------------------------
$ $
Outstanding and exercisable
January 1, 1994 1 163 200 1.44 to 2.06 1.82
Granted 308 500 1.94 to 1.99 1.98
Cancelled (450 000) 2.06 2.06
Exercised -- -- --
Expired (80 000) 1.50 to 1.88 1.52
---------
Outstanding and exercisable
December 31, 1994 941 700 1.44 to 2.06 1.78
Granted 50 000 2.61 2.61
Cancelled (192 000) 1.65 1.65
Exercised -- -- --
Expired (51 000) 1.50 to 2.06 2.05
---------
Outstanding and exercisable
December 31, 1995 748 700 1.44 to 2.61 1.85
Granted -- -- --
Cancelled -- -- --
Exercised -- -- --
Expired (7 500) 1.84 to 1.94 1.92
---------
Outstanding and exercisable
December 31, 1996 741 200 1.44 to 2.61 1.85
=========
25
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 7 - STOCK OPTIONS AND WARRANTS (continued)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:
Weighted
average Weighted
Outstanding and remaining average
Range of exercisable at contractual exercise
exercise prices December 31, 1996 life (years) price
----------------- ----------------- ------------ --------
$1.58 35 000 1.4 $1.58
$1.99 250 000 2.5 $1.99
$1.50 to $2.61 387 700 3.4 $1.79
$1.44 15 000 7.6 $1.44
$1.94 53 500 8.0 $1.94
-------
$1.44 to $2.61 741 200 3.4 $1.85
=======
There were options available for issuance under the plan as of December 31
of each year as follows: 1994 - 741,500; 1995 - 691,500 and 1996 - 696,500. Of
the 741,200 options outstanding at December 31, 1996, 403,500 options were
issued under the current plan and 337,700 options were issued under a previous
plan.
On October 11, 1995, the Company recorded a charge against operations of
$163,200, the amount paid for the cancellation of options to purchase 192,000
shares of common stock. These options had been granted to Sidney Horowitz, the
former Chairman of the Board of the Company.
At December 31, 1994, 1995 and 1996, the Company had warrants outstanding
for the purchase of 70,000 shares of Class A common stock. These warrants have
an exercise price of $1.50 per warrant and they expire on December 31, 1997.
26
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 8 - TAXES ON INCOME
Provisions for taxes on income in the consolidated statements of income
consist of the following:
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Current:
Federal $1 089 000 $ 437 000 $ --
State and local 108 000 76 000 56 000
---------- ---------- ----------
Total current 1 197 000 513 000 56 000
---------- ---------- ----------
Deferred:
Federal 41 000 337 000 721 000
State and local (4 000) 4 000 1 000
---------- ---------- ----------
Total deferred 37 000 341 000 722 000
---------- ---------- ----------
Total taxes on income $1 234 000 $ 854 000 $ 778 000
========== ========== ==========
Deferred tax assets (liabilities) consist of the following:
DECEMBER 31,
------------------------
1996 1995
---------- ----------
Current deferred tax assets:
Bad debt reserves $ 141 000 $ 134 000
Warranty and other reserves 70 000 20 000
---------- ----------
$ 211 000 $ 154 000
========== ==========
Non-current deferred tax
assets (liabilities):
Net operating loss
carryforward (Note 9(b)) $ 269 000 $ 269 000
Depreciation (94 000) --
---------- ----------
$ 175 000 $ 269 000
========== ==========
No valuation allowance has been established against the deferred tax
assets because management believes that all of the deferred tax assets will be
realized.
27
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 8 - TAXES ON INCOME (continued)
A reconciliation of the Federal statutory rate to the total effective tax
rate applicable to income before taxes on income is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
---------------- -------------- ---------------
$ % $ % $ %
--------- ----- ------- ----- ------- -----
Federal income
taxes computed at
statutory rates 1 084 000 34.0 798 000 34.0 684 000 34.0
Increase in taxes
resulting from:
State and local
taxes, net of
Federal tax
benefit 69 000 2.2 51 000 2.2 36 000 1.8
Other 81 000 2.5 5 000 .2 58 000 2.9
--------- ---- ------- ---- ------- -----
Taxes on income 1 234 000 38.7 854 000 36.4 778 000 38.7
========= ==== ======= ==== ======= =====
NOTE 9 - ACQUISITIONS AND DISCONTINUED OPERATIONS
(a) Acquisitions
During the first quarter of 1995, Florida Pneumatic purchased the assets
of Tradesman Tool Co., Inc. ("Tradesman") and Intech Industries, Inc. ("Intech")
for cash totalling approximately $753,000. Neither of these acquisitions was
material to the consolidated financial statements.
The operations of both Tradesman and Intech were merged into the
operations of Florida Pneumatic.
(b) Discontinued operations
On June 22, 1994, the Company sold substantially all of the assets and
liabilities of Triangle Sheet Metal Works, Inc. ("Triangle"), its sheet metal
contracting subsidiary, for $3,500,000 in cash. The assets sold did not include
Triangle's land, building and building improvements. As part of the sale
agreement, the Company is leasing this building to its former subsidiary, for an
annual base rental of approximately $320,000, through October 1997.
The Company had estimated the anticipated loss on the sale of Triangle in
1993 and had recognized the loss in the results of operations for the year ended
December 31, 1993. The actual loss realized on the sale of Triangle in June 1994
had no effect on the results of operations for the year ended December 31, 1994
and was not materially different from the previously estimated loss.
28
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 9 - ACQUISITIONS AND DISCONTINUED OPERATIONS (continued)
The operations of Triangle prior to its sale generated a net operating
loss carryforward for state and local purposes. The tax benefits of this
carryforward are expected to be realized upon the sale of the building referred
to above.
Results of operations applicable to discontinued operations through June
22, 1994 included revenues of $3,299,036 and a loss from operations of $539,068.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
(a) The Company and its subsidiaries lease equipment under operating
leases through 2000 for approximate minimum annual rentals as follows: 1997 -
$61,000; 1998 - $26,000; 1999 - $4,000 and 1998 - $3,000.
Rental expenses for the years ended December 31, 1996, 1995 and 1994 were
approximately $68,000, $88,000 and $77,000, respectively.
(b) The Company and its subsidiaries have adopted a defined contribution
pension plan, which covers substantially all non-union employees. Contributions
to this plan were determined as a percentage of compensation. The amounts
recognized as pension expense for this plan were approximately $218,000,
$229,000 and $213,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
One of the Company's subsidiaries also participates in a multi-employer
pension plan. This plan provides defined benefits to all union workers.
Contributions to this plan are determined by union contracts and the Company
does not administer or control the funds in any way. The amounts recognized as
pension expense for this plan were approximately $28,000, $28,000 and $26,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
(c) The Company has employment agreements with two officers. These
agreements currently provide for minimum annual aggregate salaries of $764,000
through September 1998 and $458,000 through February 2004. These two agreements
stipulate that if a change in control of the Company occurs and, as a result,
the officers are terminated or are unable to exercise their functions and duties
and therefore resign, they shall have the option to receive either full
compensation for the remaining term of the agreement or a severance allowance
equal to three times average annual compensation for the five previous years.
(d) The Company has a consulting agreement with its former Chairman of the
Board. This agreement currently provides for annual consulting fees of $200,000
through October 1998.
(e) Florida Pneumatic purchases significant amounts of pneumatic tools
from two foreign suppliers. Other sources are available. However, the loss of
either supplier could cause a temporary disruption in the flow of products,
possibly creating an adverse effect on operating results.
29
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 11 - SEGMENTS OF BUSINESS
The following presents financial information by segment for the years
ended December 31, 1996, 1995 and 1994. Operating income excludes general
corporate expenses, interest expense and income taxes. Identifiable assets are
those assets directly owned or utilized by the particular business segment.
BASEBOARD
(000 OMITTED) HEATING PNEUMATIC
CON- MANU- TOOL MANU-
1996 SOLIDATED FACTURING FACTURING OTHER
---- --------- --------- ---------- -------
Net sales $ 42 650 $ 8 171 $ 30 445 $ 4 034
======== ======= ======== =======
Operating income $ 5 960 $ 339 $ 5 208 $ 413
General corporate ======= ======== =======
expense (2 019)
Interest expense (754)
--------
Income before taxes
on income $ 3 187
========
Identifiable assets at
December 31, 1996 $ 25 943 $ 4 640 $ 19 695 $ 1 608
Corporate assets 5 389 ======= ======== =======
--------
Total assets at
December 31, 1996 $ 31 332
========
Depreciation
(including $13 corporate) $ 599 $ 220 $ 346 $ 20
======== ======= ======== =======
Capital expenditures
(including $5 corporate) $ 278 $ 208 $ 65 $ --
======== ======= ======== =======
30
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 11 - SEGMENTS OF BUSINESS (continued)
BASEBOARD
(000 OMITTED) HEATING PNEUMATIC
CON- MANU- TOOL MANU-
1995 SOLIDATED FACTURING FACTURING OTHER
---- --------- --------- ---------- -------
Net sales $ 42 646 $ 7 523 $ 31 591 $ 3 532
======== ======= ======== =======
Operating income $ 5 623 $ 334 $ 4 953 $ 336
General corporate ======= ======== =======
expense (2 256)
Interest expense (1 021)
--------
Income before taxes
on income $ 2 346
========
Identifiable assets at
December 31, 1995 $ 34 496 $ 5 486 $ 27 136 $ 1 874
Corporate assets 920 ======= ======== =======
--------
Total assets at
December 31, 1995 $ 35 416
========
Depreciation
(including $13 corporate) $ 609 $ 212 $ 364 $ 20
======== ======= ======== =======
Capital expenditures
(including $5 corporate) $ 402 $ 189 $ 208 $ --
======== ======= ======== =======
31
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 11 - SEGMENTS OF BUSINESS (continued)
BASEBOARD
(000 OMITTED) HEATING PNEUMATIC
CON- MANU- TOOL MANU-
1994 SOLIDATED FACTURING FACTURING OTHER
---- --------- --------- ---------- -------
Net sales $ 44 843 $ 7 126 $ 34 398 $ 3 319
======== ======= ======== =======
Operating income $ 5 262 $ 431 $ 4 559 $ 272
General corporate ======= ======== =======
expense (2 191)
Interest expense (1 060)
--------
Income before taxes
on income $ 2 011
========
Identifiable assets at
December 31, 1994 $ 31 707 $ 4 789 $ 25 087 $ 1 831
Corporate assets 1 306 ======= ======== =======
--------
Total assets at
December 31, 1994 $ 33 013
========
Depreciation
(including $12 corporate) $ 583 $ 220 $ 331 $ 20
======== ======= ======== =======
Capital expenditures
(including $8 corporate) $ 212 $ 81 $ 123 $ --
======== ======= ======== =======
The baseboard heating manufacturing segment, which sells to plumbing
supply houses primarily in the nrthern tier of the United States, is directly
affected by the housing industry. The pneumatic tool manufacturing segment sells
primarily throughout the United States.
The pneumatic tool manufacturing segment has two major customers that
accounted for 48.2%, 42.2% and 49.6% of consolidated net sales for the years
ended December 31, 1996, 1995 and 1994, respectively. Two customers accounted
for 62.3% of consolidated accounts receivable as of December 31, 1996 and three
customers accounted for 68.1% of consolidated accounts receivable as of December
31, 1995.
32
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 12 - UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
Unaudited interim consolidated financial information for the two years
ended December 31, 1996 and 1995 is summarized as follows:
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- ---------- ------------- ------------
1996 $ $ $ $
----
Net sales 9 334 135 9 593 600 12 857 555 10 865 052
========= ========= ========== ==========
Gross profit 3 191 130 3 264 241 4 070 487 3 426 184
========= ========= ========= =========
Income available to
common shareholders 284 457 289 959 646 066 469 460
======= ======= ======= =======
Earnings per share of common stock (a):
Primary .09 .09 .20 .14
=== === === ===
Fully diluted .09 .09 .19 .14
=== === === ===
1995
----
Net sales 9 604 535 10 696 735 9 854 150 12 490 534
========= ========== ========= ==========
Gross profit 3 218 113 3 268 804 3 219 425 3 924 562
========= ========= ========= =========
Income available to
common shareholders 206 651 232 709 132 358 656 912
======= ======= ======= =======
Earnings per share of common stock (a):
Primary and
fully diluted .06 .07 .04 .21
=== === === ===
(a) After giving effect to dividends paid on preferred stock, as described
in the Summary of Accounting Policies.
33
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Interest $ 1 029 075 $ 1 159 936 $ 1 249 465
=========== =========== ===========
Income taxes $ 1 242 199 $ 340 407 $ 266 822
=========== =========== ===========
NOTE 14 - NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is effective for fiscal years
ending after December 15, 1997. The Company will adopt Statement No. 128 for the
year ended December 31, 1997. The pro forma effect on the consolidated financial
statements for the year ended December 31, 1996 is as follows:
BASIC DILUTED
------- -------
Net income $1 953 287 $1 953 287
Dividends on preferred stock (263 345) (263 345)
---------- ----------
Net income for earnings per
common share $1 689 942 $1 689 942
========== ==========
Weighted average number of common
shares outstanding during the year 2 928 867 2 928 867
Common share equivalents - shares
issuable upon exercise of stock
options -- 308 052
--------- ---------
Weighted average number of common
shares and common share equivalents
used in calculation of earnings
per common share 2 928 867 3 236 919
========= =========
Earnings per common share $ .58 $ .52
===== =====
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the
Registrant is set forth in the Registrant's definitive Proxy Statement for its
1997 Annual Meeting of Stockholders (the "Proxy Statement") to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth in the Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to the security ownership of certain beneficial
owners and management is set forth in the Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
set forth in the Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, and is hereby incorporated by reference.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
PAGE
----
(a) Financial statements and financial statement schedules
(1) The consolidated financial statements of the Registrant as set
forth under Item 8 are filed as part of this report.
(2) The following consolidated financial statement schedule for the
three years ended December 31, 1996, 1995 and 1994 is filed as part
of this report:
Schedule II - Valuation and Qualifying Accounts 37
All other schedules are omitted because they are not required, are
not applicable, or the required information is otherwise shown in the
financial statements or notes thereto.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by the Registrant during the
last quarter of the period covered by this report.
(c) The following exhibits are filed as part of this report:
Exhibit 11 - Schedule of Computation of Earnings
Per Common Share 39
Exhibit 23 - Consent of Experts 40
Exhibit 27 - Financial Data Schedule
36
P & F INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
=======================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- -------------------- ---------- --------
ADDITIONS
--------------------
CHARGED
BALANCE AT TO COSTS CHARGED BALANCE
BEGINNING AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------- -------- ---------- ---------
Year ended December 31, 1996:
Allowance for possible losses $ 350 684 $ 59 817 $ -- $ 40 091(a) $ 370 410
========== ========== ======== ========== ==========
Year ended December 31, 1995:
Allowance for possible losses $ 354 252 $ 77 307 $ -- $ 80 875(a) $ 350 684
========== ========== ======== ========== ==========
Reserve for disposal of
discontinued operations $ 69 078 $ -- $ -- $ 69 078(a) $ --
========== ========== ======== ========== ==========
Year ended December 31, 1994:
Allowance for possible losses $ 351 734 $ 99 996 $ -- $ 97 478(a) $ 354 252
========== ========== ======== ========== ==========
Reserve for disposal of
discontinued operations $3 296 000 $ -- $ -- $3 226 922 $ 69 078
========== ========== ======== ========== ==========
- ---------
(a) Write-off of expenses against reserve.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ RICHARD A. HOROWITZ By: /s/ LEON D. FELDMAN
------------------------------ ------------------------------
Richard A. Horowitz Leon D. Feldman
Chairman of the Board Executive Vice President
President Treasurer
Principal Executive Officer Principal Financial and
Principal Operating Officer Accounting Officer
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ ROBERT L. DUBOFSKY /s/ LEON D. FELDMAN
- -------------------------------- --------------------------------
Robert L. Dubofsky, Director Leon D. Feldman, Director
/s/ RICHARD A. HOROWITZ
- -------------------------------- ________________________________
Richard A. Horowitz, Director Sidney Horowitz, Director
/s/ ARTHUR HUG, JR. /s/ DENNIS KALICK
- -------------------------------- --------------------------------
Arthur Hug, Jr., Director Dennis Kalick, Director
________________________________ ________________________________
Earle K. Moore, Director Marc A. Utay, Director
Date: March 27, 1997
38