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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 MARCH 31, 1999
[ ] 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
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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 May 14, 1999, there were outstanding 3,249,345 shares of the
Registrant's Class A Common Stock, par value $1.00 per share.
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P & F INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Financial Statements.........................................................................
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998..................... 1-2
Consolidated Statements of Income for the three months ended March 31, 1999 and 1998....... 3
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998... 4-5
Notes to Consolidated Financial Statements................................................. 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 11-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 15
PART II
Item 1. Legal Proceedings............................................................................ 16
Item 2. Changes in Securities........................................................................ 16
Item 3. Defaults Upon Senior Securities.............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 16
Item 5. Other Information............................................................................ 16
Item 6. Exhibits and Reports on Form 8-K............................................................. 16
SIGNATURES............................................................................................... 17
EXHIBIT INDEX............................................................................................ 18
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS
CURRENT:
Cash............................................ $ 1,571,037 $ 2,280,788
Accounts receivable, less allowance for possible
losses of $501,119 in 1999
and $498,669 in 1998.......................... 11,455,957 8,542,204
Inventories..................................... 19,236,239 17,021,475
Deferred income taxes........................... 507,000 507,000
Prepaid expenses and other assets............... 815,291 586,913
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TOTAL CURRENT ASSETS........................ 33,585,524 28,938,380
----------- ------------
PROPERTY AND EQUIPMENT:
Land............................................ 1,182,939 1,182,939
Buildings and improvements...................... 5,798,308 5,773,608
Machinery and equipment......................... 10,401,328 9,724,919
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17,382,575 16,681,466
Less accumulated depreciation and
amortization.................................. 6,387,035 6,052,899
----------- ------------
NET PROPERTY AND EQUIPMENT.................. 10,995,540 10,628,567
----------- ------------
GOODWILL, net of accumulated amortization of
$1,247,156 in 1999 and $1,190,040 in 1998....... 8,217,803 8,274,918
OTHER ASSETS...................................... 211,461 236,614
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TOTAL ASSETS................................ $53,010,328 $48,078,479
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings........................... $ 7,500,000 $ 3,500,000
Accounts payable................................ 5,337,712 4,844,403
Accruals:
Compensation.................................. 900,739 1,944,960
Other......................................... 2,670,477 2,130,026
Current maturities of long-term debt............ 776,065 524,974
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TOTAL CURRENT LIABILITIES................... 17,184,993 12,944,363
LONG-TERM DEBT, less current maturities........... 9,904,126 10,193,064
DEFERRED INCOME TAXES............................. 491,000 491,000
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27,580,119 23,628,427
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SHAREHOLDERS' EQUITY:
Common stock:
Class A--$1 par; shares authorized 7,000,000;
outstanding 3,249,345 and 3,239,345.......... 3,249,345 3,239,345
Class B--$1 par; shares authorized
2,000,000.................................... -- --
Additional paid-in capital...................... 8,029,427 8,020,677
Retained earnings............................... 14,151,437 13,190,030
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TOTAL SHAREHOLDERS' EQUITY.................. 25,430,209 24,450,052
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY..................................... $53,010,328 $48,078,479
----------- ------------
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</TABLE>
3
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
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<S> <C> <C>
REVENUES:
Net sales........................................................................ $ 17,876,353 $ 12,529,183
Other............................................................................ 231,915 11,941
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18,108,268 12,541,124
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COSTS AND EXPENSES:
Cost of sales.................................................................... 12,546,061 7,859,888
Selling, administrative and general.............................................. 3,721,495 3,312,558
Interest--net.................................................................... 288,305 115,809
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16,555,861 11,288,255
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INCOME BEFORE TAXES ON INCOME...................................................... 1,552,407 1,252,869
TAXES ON INCOME.................................................................... 591,000 472,000
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NET INCOME......................................................................... $ 961,407 $ 780,869
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Weighted average common shares outstanding:
Basic............................................................................ 3,248,247 3,127,802
Diluted.......................................................................... 3,729,720 3,599,511
Earnings per share of common stock:
Basic............................................................................ $.30 $.25
Diluted.......................................................................... $.26 $.22
</TABLE>
4
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 961,407 $ 780,869
------------- -------------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization................................................... 394,581 221,353
Provision for losses on accounts receivable..................................... 1,500 6,259
Decrease (increase):
Accounts receivable............................................................. (2,915,253) (303,355)
Inventories..................................................................... (2,214,764) (1,090,511)
Prepaid expenses and other assets............................................... (206,555) (10,456)
Increase (decrease):
Accounts payable................................................................ 493,309 1,270,196
Accruals and other.............................................................. (503,770) (368,483)
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Total adjustments............................................................. (4,950,952) (274,997)
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Net cash (used in) provided by operating activities......................... (3,989,545) 505,872
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................................................. (701,109) (284,655)
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Net cash used in investing activities....................................... (701,109) (284,655)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings............................................... 4,000,000 3,985,843
Repayments of short-term borrowings............................................... -- (3,985,843)
Principal payments on long-term debt.............................................. (37,847) (39,301)
Proceeds from exercise of stock options........................................... 18,750 173 594
Redemption of subordinated debentures............................................. -- (1,369,200)
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Net cash used in financing activities....................................... 3,980,903 (1,234,907)
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NET (DECREASE) INCREASE IN CASH..................................................... (709,751) (1,013,690)
CASH AT BEGINNING OF PERIOD......................................................... 2,280,788 2,092,244
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CASH AT END OF PERIOD............................................................... $ 1,571,037 $ 1,078,554
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes.................................................................... $ 53,300 $ 171,150
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Interest........................................................................ $ 346,420 $ 118,199
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</TABLE>
5
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P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF FINANCIAL STATEMENT PRESENTATION
P & F Industries, Inc. (the "Company") conducts its business operations
through three wholly-owned subsidiaries. Embassy Industries, Inc. ("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 division. 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 importation and sale of compressor air filters. Florida
Pneumatic also markets, through its Berkley Tool division, 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 Manufacturing,
Inc. ("Green"), a Delaware corporation, 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.
The 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.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial
statements. In the opinion of the Company, the unaudited consolidated financial
statements include all adjustments necessary to a fair statement of the results
for the interim periods presented. 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, since the operations of some of the
Company's subsidiaries are seasonal in nature.
The consolidated balance sheet information for December 31, 1998 was derived
from the audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. These interim financial
statements should be read in conjunction with that report.
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.
NOTE 2--INVENTORIES
Major classes of inventory were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
Finished goods................................................. $ 14,730,666 $ 13,141,218
Work in process................................................ 720,198 435,453
Raw materials and supplies..................................... 3,785,375 3,444,804
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$ 19,236,239 $ 17,021,475
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</TABLE>
6
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITION
On September 16, 1998, the Company acquired certain assets, and assumed
certain liabilities, of Green Manufacturing, Inc., an Ohio corporation and a
manufacturer of custom-engineered hydraulic cylinders, prefabricated stairways
and platforms and tractor-mounted post hole diggers. The purchase price for the
acquisition was $10,500,000 in cash, $10,000,000 of which was provided by an
acquisition loan made pursuant to a Credit Agreement, dated as of July 23, 1998,
as amended, between the Company and its bank. The balance of $500,000 was
provided by working capital funds. The purchase price of $10,500,000 includes
$50,000 in consideration of a covenant not to compete.
As part of the acquisition, the Company also assumed the outstanding balance
of $1,095,000 on an Economic Development Revenue Bond issued by Wood County,
Ohio.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the accompanying consolidated financial statements
include the results of operations of the acquired company only from the date of
acquisition. The excess of acquisition costs over the fair value of net assets
acquired is included in the accompanying balance sheets as "Goodwill". Also
included in "Goodwill" are costs totalling $448,163 incurred in connection with
this acquisition.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company and Green Manufacturing, Inc., as
though the acquisition had been made January 1, 1998. The pro forma amounts give
effect to appropriate adjustments for amortization of goodwill and other
intangible assets, interest expense and income taxes. The pro forma amounts
presented are not necessarily indicative of future operating results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
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<S> <C> <C>
Revenues....................................................... $ 18,108,268 $ 17,103,225
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Net income..................................................... $ 961,407 $ 821,429
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Earnings per share of common stock from continuing operations:
Basic........................................................ $.30 $.26
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Diluted...................................................... $.26 $.23
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</TABLE>
7
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P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SEGMENTS OF BUSINESS
The following tables present financial information by segment for the
periods ended March 31, 1999 and 1998. Segment profit excludes general corporate
expenses, interest expense and income taxes. There were no intersegment
revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------
PNEUMATIC
TOOLS AND
RELATED HYDRAULIC HEATING
CONSOLIDATED EQUIPMENT CYLINDERS EQUIPMENT OTHER
------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues from external customers...................... $ 17,876 $ 9,535 $ 5,051 $ 1,900 $ 1,390
------------ ----------- ----------- ----------- ---------
------------ ----------- ----------- ----------- ---------
Segment profit........................................ $ 2,568 $ 2,031 $ 340 $ 21 $ 176
------------ ----------- ----------- ----------- ---------
------------ ----------- ----------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------
PNEUMATIC
TOOLS AND
RELATED HYDRAULIC HEATING
CONSOLIDATED EQUIPMENT CYLINDERS EQUIPMENT OTHER
------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues from external customers...................... $ 12,529 $ 9,572 $ -- $ 1,873 $ 1,084
------------ ----------- ----------- ----------- ---------
------------ ----------- ----------- ----------- ---------
Segment profit........................................ $ 2,094 $ 1,958 $ -- $ 31 $ 105
------------ ----------- ----------- ----------- ---------
------------ ----------- ----------- ----------- ---------
</TABLE>
The reconciliation of combined operating profits for reportable segments to
consolidated income before income taxes is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
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<S> <C> <C>
Total profit for reportable segments.............................. $ 2,567,985 $ 2,093,546
General corporate expenses........................................ (727,273) (724,868)
Interest expense.................................................. (288,305) (115,809)
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Income before income taxes........................................ $ 1,552,407 $ 1,252,869
------------ ------------
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</TABLE>
8
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings per common
share--income available to common shareholders................ $ 961,407 $ 780,869
------------ ------------
------------ ------------
Denominator:
Denominator for basic earnings per share--weighted average
common shares outstanding..................................... 3,248,247 3,127,802
Effect of dilutive securities:
Common stock options.......................................... 481,473 471,709
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Denominator for diluted earnings per share--adjusted weighted
average common shares and assumed conversions................. 3,729,720 3,599,511
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Earnings per common share:
Basic........................................................... $.30 $.25
------------ ------------
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Diluted......................................................... $.26 $.22
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</TABLE>
9
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FIRST QUARTER ENDED MARCH 31, 1999 COMPARED WITH FIRST QUARTER ENDED MARCH 31,
1998
Consolidated revenues increased 44.4%, from $12,541,124 to $18,108,268,
primarily due to the acquisition of Green, which had revenues of $5,050,745 from
hydraulic cylinders and other equipment in the first quarter of 1999. Revenues
from pneumatic tools and related equipment increased 1.9%, from $9,584,170 to
$9,767,148, due primarily to a significant new stocking order for the jack
product line. Selling prices of pneumatic tools and related equipment were
virtually unchanged from the prior year.
Revenues from heating equipment increased 1.4%, from $1,873,058 to
$1,899,890. This increase was due primarily to an increase in baseboard product
sales. Revenues from hardware increased 28.3%, from $1,083,706 to $1,390,485.
This increase in hardware sales was the result of sales to one large new
customer. Selling prices of all products were virtually unchanged.
Consolidated gross profit, as a percentage of revenues, decreased from 37.3%
to 30.7%, due primarily to the lower overall gross profits associated with the
hydraulic cylinder subsidiary acquired in September of 1998. Gross profit from
pneumatic tools and related equipment decreased from 39.1% to 38.5%, due
primarily to a decrease in the value of the U.S. dollar as compared to the
Japanese yen, which increased the cost of imported product. This was partially
offset by a more profitable product mix. Gross profit from heating equipment
decreased from 34.6% to 34.3%, due to an unfavorable product mix, and gross
profit from hardware increased from 26.1% to 28.0%, due to a more profitable
product mix. Gross profit from hydraulic cylinders and other equipment was 15.1%
for the first quarter of 1999.
Consolidated selling, general and administrative expenses increased 12.4%,
from $3,312,558 to $3,721,495, primarily due to the addition of Green. Interest
expense increased 149.0%, from $115,809 to $288,305, primarily as a result of
the increase in long-term debt related to the acquisition of Green in September
of 1998 and an increase in short-term borrowings to fund working capital needs.
The effective tax rates for the quarters ended March 31, 1999 and 1998 were
38.1% and 37.7%, 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):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
----------- ------------ -----------
<S> <C> <C> <C>
Working Capital..................................... $ 16,401 $ 15,994 $ 16,530
Current Ratio....................................... 1.95 to 1 2.24 to 1 3.10 to 1
Shareholders' Equity................................ $ 25,430 $ 24,450 $ 21,075
</TABLE>
During the quarter ended March 31, 1999, accounts receivable increased by
approximately $2,914,000. This increase was due primarily to an increase in
accounts receivable at Florida Pneumatic of approximately $2,786,000. Florida
Pneumatic's accounts receivable were at an unusually low level at December 31,
1998 because of particularly strong collections in December. Inventories
increased by approximately $2,215,000, due primarily to increased purchases made
in anticipation of increased sales and the timing of the receipt of imports from
the Far East. Accounts payable increased approximately $493,000, primarily as a
result of the increase in inventories.
10
<PAGE>
On July 23, 1998, the Company signed a new credit agreement with European
American Bank. This agreement, as amended on September 16, 1998, 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 total of $12,000,000, with various sublimits, for direct
borrowings, letters of credit, bankers' acceptances and equipment loans. At
March 31, 1999, there were direct borrowings totalling $7,500,000 outstanding
against this facility. There was also a commitment at March 31, 1999 of
approximately $738,000 for open letters of credit.
The term loan facility provides a commitment of $15,000,000 to finance
acquisitions subject to the lending bank's approval. As noted below, $10,000,000
of this facility was used to help finance the acquisition of Green and there was
$6,000,000 still outstanding against this facility at March 31, 1999. There was
also a standby letter of credit totalling approximately $975,000 outstanding
against this facility at March 31, 1999. 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 March 31, 1999
was approximately $2,287,000.
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 March 31, 1999, and for the three months then ended, the
Company satisfied all of these covenants.
On September 16, 1998, the Company acquired certain assets and liabilities
of Green Manufacturing, Inc. for $10,500,000, including the assumption of
$1,095,000 of an outstanding Economic Development Revenue Bond issued by Wood
County, Ohio. The acquisition was financed with $500,000 in working capital
funds and a $10,000,000 7-year term loan from the Company's principal bank. This
loan bears interest at LIBOR plus 175 basis points and is payable with interest
only for up to one year at the Company's discretion. The 30 day LIBOR at March
31, 1999 was approximately 4.9%. As of March 31, 1999, $4,000,000 of the loan
had been repaid. The Economic Development Revenue Bond was issued on November
16, 1994 and provides for annual retirement payments each November 1, over a
10-year period. The Bond bears interest at variable rates. The interest rate at
March 31, 1999 was approximately 4.2%. At March 31, 1999, the balance
outstanding on the Bond was $955,000.
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 two years has had a positive impact
on the Company's results of operations and its financial position. Any future
weakness of the dollar could, however, have a negative impact on the Company's
results of operations.
Capital spending for the quarter ended March 31, 1999 was approximately
$701,000. The total amount was provided from working capital. Capital
expenditures for the rest of 1999 are expected to total approximately
$1,000,000, some of which may be financed through the Company's credit
facilities. Included in the expected total for the rest of 1999 are capital
expenditures relating to new products, expansion of existing product lines and
replacement of old equipment.
On January 30, 1998, the Company redeemed all of its outstanding 13.75%
Subordinated Debentures, due January 1, 2017, at 100% of the principal amount of
the Debentures, plus accrued and unpaid interest to the redemption date. The
funds used for this redemption, totalling $1,384,686, were derived from working
capital.
11
<PAGE>
The Company continues to conduct an acquisition search. The funds for an
acquisition will be provided by working capital and existing credit facilities,
including the $15,000,000 credit facility for acquisitions referred to above.
The Company believes that cash on hand, cash generated by future operations
and cash available through its credit facilities will be sufficient to allow the
Company to support its capital expenditure program and to meet its general
working capital needs.
YEAR 2000
The Year 2000 (Y2K) issue is the result of computer programs being written
for, or microprocessors using, two digits (rather than four) to define the
applicable year. Company computer programs that have date-sensitive software may
recognize a date using 00 as the year 1900 rather than the year 2000, which
could result in system failures or miscalculations. The Company is currently
working to mitigate the Y2K issue and has established processes for assessing
the risks and associated costs.
The Company categorizes its Y2K efforts as follows: hardware, software,
embedded processors, vendors and customers. Progress in assessing and
remediating information technology systems (hardware and software) and
non-information technology systems (embedded processors) continues to be tracked
in phases including assessment, identification of non-compliant systems,
remediation, testing and verification. Hardware, software and embedded
processors have been assessed and remediation is in progress. The Company's Y2K
project is progressing and a large portion of its internal remediation work was
completed at March 31, 1999. The Company is using internal and external
resources to remediate and test its systems.
The Company has initiated communications with significant vendors and
customers to coordinate the Y2K issue and is in the process of determining the
Company's vulnerability if these companies fail to remediate their Y2K issues.
There can be no guarantee that the systems of other companies will be timely
remediated or that other companies' failure to remediate Y2K issues would not
have a material adverse effect on the Company. The Company continues to develop
contingency plans to mitigate risks associated with the Y2K issue.
Costs incurred to date in addressing the Y2K issue have been expensed as
incurred and are not material. Based on current information, the total cost to
remediate and test the Company's systems is not expected to be material.
The Company presently believes that, with remediation, Y2K risks can be
mitigated. Although the Company is not currently aware of any material internal
operational or financial Y2K related issues, the Company cannot provide
assurances that the computer systems, products, services or other systems upon
which the Company depends will be Y2K ready on schedule, that the costs of its
Y2K program will not become material or that the Company's contingency plans
will be adequate. The Company is currently unable to evaluate accurately the
magnitude, if any, of the Y2K related issues arising from the Company s vendors
and customers. If any such risks (either with respect to the Company or its
vendors or customers) materialize, the Company could experience serious
consequences to its business which could have material adverse effects on the
Company's financial condition, results of operations and liquidity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for transactions
entered into after January 1, 2000 and requires that all derivative instruments
be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of the hedge
transaction and the type of hedge transaction. The ineffective portion of all
hedges will be recognized in earnings. The Company is in the process of
reviewing SFAS 133
12
<PAGE>
to determine what impact, if any, the adoption of SFAS 133 will have on its
results of operations and its financial position. Based on current market
conditions, the Company does not believe that the impact will be material.
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. It 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 limiting, in part, the impact of currency fluctuations. Using primarily
forward exchange contracts, the Company hedges some of those transactions that,
when remeasured according to generally accepted accounting principles, 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 March 31, 1999, the Company held open
hedge forward contracts to deliver approximately $2,287,000 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 March 31, 1999 is approximately $254,000.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Registrant is not a party to any litigation that is expected to have a
material adverse effect on its business.
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 signature page.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
March 31, 1999.
13
<PAGE>
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.
<TABLE>
<S> <C> <C>
P & F INDUSTRIES, INC.
(Registrant)
By: /s/ JOSEPH A. MOLINO, JR.
-----------------------------------------
Joseph A. Molino, Jr.
VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
Dated: May 14, 1999
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3A to the
Registrant's Registration Statement on Form S-8 filed on September 20, 1989).
3.2 By-laws of the Registrant (Incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
4.1 Rights Agreement, dated as of August 23, 1994, between the Registrant and American Stock Transfer &
Trust Company, as Rights Agent (Incorporated by reference to Exhibit 1 to the Registrant's Registration
Statement on Form 8-A dated August 24, 1994).
4.2 Amendment to Rights Agreement, dated as of April 11, 1997, between the Registrant and American Stock
Transfer & Trust Company, as Rights Agent (Incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K dated April 11, 1997).
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
Amendment No. 1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1998).
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 Amendment No. 1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
4.5 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.
27 Financial Data Schedules (submitted to the Securities and Exchange Commission in electronic format).
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN P & F INDUSTRIES, INC.'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,571,037
<SECURITIES> 0
<RECEIVABLES> 11,455,957
<ALLOWANCES> 0
<INVENTORY> 19,236,239
<CURRENT-ASSETS> 33,585,524
<PP&E> 17,382,575
<DEPRECIATION> 6,387,035
<TOTAL-ASSETS> 53,010,328
<CURRENT-LIABILITIES> 17,184,993
<BONDS> 9,904,126
0
0
<COMMON> 3,249,345
<OTHER-SE> 22,180,864
<TOTAL-LIABILITY-AND-EQUITY> 53,010,328
<SALES> 17,876,353
<TOTAL-REVENUES> 18,108,268
<CGS> 12,546,061
<TOTAL-COSTS> 12,546,061
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 288,305
<INCOME-PRETAX> 1,552,407
<INCOME-TAX> 591,000
<INCOME-CONTINUING> 961,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 961,407
<EPS-PRIMARY> .30
<EPS-DILUTED> .26
</TABLE>
