<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1996.
REGISTRATION NO. 333-7477.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
Q.E.P. CO., INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5072 13-2983807
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code) Identification No.)
LEWIS GOULD
990 SOUTH ROGERS CIRCLE 990 SOUTH ROGERS CIRCLE
BOCA RATON, FLORIDA 33487 BOCA RATON, FLORIDA 33487
TELEPHONE: (561) 994-5550 TELEPHONE: (561) 994-5550
(Address and telephone number of registrant's (Name, address and telephone number
principal executive offices) of agent for service)
</TABLE>
Copies to:
<TABLE>
<S> <C>
ROBERT W. WALTER, ESQ. JOSEPH J. HERRON, ESQ.
DAVID C. ROOS, ESQ. KAREN K. DREYFUS, ESQ.
BERLINER ZISSER WALTER & GALLEGOS, P.C. CHRISTOPHER R. DI MAURO, ESQ.
SUITE 4700 610 NEWPORT CENTER DRIVE, SUITE 1700
1700 LINCOLN STREET O'MELVENY & MYERS LLP
DENVER, COLORADO 80203 NEWPORT BEACH, CALIFORNIA 92660
TELEPHONE: (303) 830-1700 TELEPHONE: (714) 760-9600
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock(2)............................. 1,380,000 $ 10.50 $14,490,000 $4,996.56
- -----------------------------------------------------------------------------------------------------------
Common Stock(3)............................. 4,597 $ 10.50 $ 48,269 $ 16.65
- -----------------------------------------------------------------------------------------------------------
Representative's Warrants for Common
Stock..................................... 120,000 $ .001 $ 120 $ .03
- -----------------------------------------------------------------------------------------------------------
Common Stock underlying Representative's
Warrants(4)............................... 120,000 $ 12.60 $ 1,512,000 $ 521.38
- -----------------------------------------------------------------------------------------------------------
Total............................. $16,050,389 $5,534.62
===========================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) Includes 180,000 shares of Common Stock contained in the over-allotment
option and 200,000 shares of Common Stock to be offered by certain selling
shareholders.
(3) Issuable in exchange for 183,889 shares of the Company's outstanding
Preferred Stock.
(4) Pursuant to Rule 416, includes such indeterminate number of additional
shares of Common Stock as may be required for issuance on exercise of the
Representative's Warrants as a result of any adjustment in the number of
shares of Common Stock issuable on such exercise by reason of the
anti-dilution provisions of the Representative's Warrants. The shares of
Common Stock underlying the Representative's Warrants are being registered
for resale only.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
Q.E.P. CO., INC.
CROSS REFERENCE SHEET BETWEEN ITEMS OF FORM S-1
AND PROSPECTUS PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM IN FORM S-1 LOCATION IN PROSPECTUS
------------------------------------------ ------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover of Prospectus....... Facing Page; Cross Reference Sheet;
Outside Front Cover Page.
2. Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front Cover Page; Outside Back
Cover Page.
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Changes...... Prospectus Summary; Risk Factors.
4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds.
5. Determination of Offering Price........... Underwriting.
6. Dilution.................................. Dilution.
7. Selling Security Holders.................. Principal and Selling Shareholders;
Selling Shareholders.
8. Plan of Distribution...................... Inside Front Cover Page; Principal and
Selling Shareholders; Selling
Shareholders; Plan of Distribution;
Underwriting.
9. Description of Securities to be
Registered.............................. Outside Front Cover Page; Capitalization;
Description of Securities; Underwriting.
10. Interest of Named Experts and Counsel..... Legal Matters; Experts.
11. Information with Respect to the
Registrant.............................. Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Principal and Selling Shareholders;
Certain Transactions; Consolidated
Financial Statements.
12. Discussion of Commission Position on
Indemnification for Securities Act
Liabilities............................. Management -- Limitation of Liability and
Indemnification.
</TABLE>
<PAGE> 3
EXPLANATORY NOTE
The form of Prospectus filed as part of this Registration Statement has two
cover pages, the first of which relates to an underwritten public offering of
1,200,000 shares of Common Stock by Q.E.P. Co., Inc. and certain selling
shareholders and the second of which relates to an offering to be made
exclusively by certain other selling shareholders. All Prospectuses distributed
in the underwritten public offering will bear the first form of cover page,
appropriately completed after the Registration Statement becomes effective. Ten
copies of the form of Prospectus in the exact form in which it is to be used
after the effective date will be filed with the Securities and Exchange
Commission pursuant to Rule 424(b) of the General Rules and Regulations under
the Securities Act of 1933, as amended.
The second cover page pertains to 4,597 shares of Common Stock to be
offered by certain selling shareholders (the "Selling Shareholders") independent
of the underwritten offering. It is anticipated that the Prospectus used by the
Selling Shareholders will bear the second form of cover page, appropriately
completed after the Registration Statement becomes effective. This form of
Prospectus will also include the additional information concerning the Selling
Shareholders and the plan of distribution disclosed under the captions "Selling
Shareholders" and "Plan of Distribution" included in this Registration
Statement, will include the section entitled "Principal Shareholders", and will
omit sections not applicable to such sales including "Principal and Selling
Shareholders," "Underwriting" and "Legal Matters." The Selling Shareholders and
Plan of Distribution sections will not be included in the form of Prospectus
distributed in connection with the underwritten public offering.
<PAGE> 4
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 5, 1996
1,200,000 SHARES
[QEP LOGO]
COMMON STOCK
---------------------
Of the shares of Common Stock offered hereby, 1,000,000 shares are being
sold by Q.E.P. Co., Inc. ("QEP" or the "Company") and 200,000 shares are being
sold by certain shareholders of the Company (the "Selling Shareholders"). See
"Principal and Selling Shareholders." The Company will not receive any proceeds
from the sale of shares by the Selling Shareholders. It is currently anticipated
that the initial public offering price will be between $9.50 and $10.50 per
share. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. Application has been made to have
the Common Stock approved for quotation on the Nasdaq National Market under the
symbol "QEPC."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION
PROSPECTIVE INVESTORS SHOULD CONSIDER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
=================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total(3).......................... $ $ $ $
=================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act"). The Company has also agreed
to issue, for nominal consideration, registered Representative's Warrants to
purchase 120,000 shares of Common Stock. The shares of Common Stock
underlying the Representative's Warrants have been registered for resale
only. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $575,000 and
$20,000 payable by the Selling Shareholders, including the Representative's
nonaccountable expense allowance.
(3) The Company has granted to the Underwriters a 45-day option to purchase an
aggregate of up to 180,000 additional shares of Common Stock solely to cover
over-allotments, if any. If this option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to Selling Shareholders will be $ , $ , $
and $ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered by the Underwriters subject to prior
sale when, as and if delivered to and accepted by them, and subject to the right
of the Underwriters to withdraw, cancel or modify such offer and reject orders
in whole or in part. It is expected that delivery of the certificates for the
Common Stock will be made at the offices of Cruttenden Roth Incorporated,
Irvine, California, on or about , 1996.
---------------------
CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 5
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 5, 1996
4,597 SHARES
[QEP LOGO]
COMMON STOCK
---------------------
This Prospectus relates to 4,597 shares of Common Stock being sold by
certain Selling Shareholders. The 4,597 shares of Common Stock of Q.E.P. Co.,
Inc. (the "Company") were issued to the Selling Shareholders in exchange for a
total of 183,889 shares of the Company's Preferred Stock. The Selling
Shareholders may offer the shares of Common Stock owned by them for sale as
principals for their own accounts at any time, and from time to time, in the
over-the-counter market at prices prevailing at the time of sale, commencing
from the date of this Prospectus. This Prospectus, which forms a part of the
registration statement filed by the Company, must be current at any time during
which a Selling Shareholder sells shares of Common Stock. See "Selling
Shareholders" and "Description of Securities."
This Prospectus (without certain information concerning the Selling
Shareholders) was also used in connection with an underwritten public offering
by the Company and certain other selling shareholders of 1,200,000 shares of
Common Stock which became effective on , 1996. In connection with
the underwritten offering, the Company issued to the managing underwriter (the
"Representative") warrants to purchase up to 120,000 shares of Common Stock (the
"Representative's Warrants") for $ per share, and granted to the
Representative an option, exercisable at any time prior to , 1996,
to purchase up to 180,000 shares of Common Stock solely to cover over-allotments
(the "over-allotment option"). See "Prospectus Summary" and "Capitalization."
References in this Prospectus to the offering, unless otherwise noted, are to
the underwritten offering. References in this Prospectus to the Selling
Shareholders, except as contained under "Selling Shareholders" and "Plan of
Distribution" or unless otherwise noted, are to the selling shareholders in the
underwritten offering. The Representative will not be involved in, nor will it
receive any compensation in connection with, the sale of securities by the
Selling Shareholders.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION
PROSPECTIVE INVESTORS SHOULD CONSIDER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 6
Pictured on the inside front cover are color copies of the cover of one of
the Company's product catalogs and two product catalogs from two subsidiaries.
Also presented are four pictures of the Company's warehouse and manufacturing
facilities and the Company's logo.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
On the effective date of the Registration Statement of which this
Prospectus forms a part, the Company will become a "reporting company" under the
Securities Exchange Act of 1934 (the "1934 Act"). The Company intends to
register the Common Stock under the 1934 Act as of the effective date of the
Registration Statement. The Company intends to furnish annual reports to
shareholders containing audited consolidated financial statements, quarterly
reports and such other periodic reports as it may determine to be appropriate or
as may be required by law. Q.E.P.(TM), O'Tool(TM), Marion Tool(TM) and Andrews
Tools(TM) are trademarks of Q.E.P. Co., Inc. This Prospectus also contains
trademarks of other companies.
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information
contained in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option or options granted or reserved under the Company's stock
option plan, and (ii) gives effect to a recapitalization effective August ,
1996 in connection with the Company's reincorporation in Delaware. Industry data
used in this Prospectus was obtained from industry publications that the Company
believes to be reliable, but has not independently verified. Unless the context
indicates otherwise, references in this Prospectus to the "Company" are to
Q.E.P. Co., Inc. and its subsidiaries.
THE COMPANY
The Company is a leading manufacturer, marketer and distributor of a broad
line of specialty tools and related products for the home improvement market.
Under brand names including "QEP," "O'Tool," "Marion Tool" and "Andrews Tools,"
the Company markets over 4,000 specialty tools and related products used
primarily for surface preparation and installation of ceramic tile, carpet,
marble, masonry, drywall and paint. The Company's products include, among other
items, trowels, floats, tile cutters, wet saws, spacers, nippers, pliers, carpet
trimmers and cutters, knives and abrasives. The Company's products are sold
through home improvement retailers including national and regional chains such
as Home Depot, Lowe's and Hechinger/Home Quarters, specialty distributors to the
hardware, construction and home improvement trades, retailers such as Ace
Hardware and New York Carpet World, and OEMs such as Stanley and Red Devil. The
Company's full line of specialty tools and related products are marketed for use
by do-it-yourself consumers as well as construction and remodeling
professionals.
Since fiscal 1992, the Company's net sales have increased at a compound
annual rate of 38.0% to $25,272,000 in fiscal 1996. In the three months ended
May 31, 1996, the Company's net sales increased 35.6% over the prior comparable
period to $7,702,000. The growth in net sales over the last four fiscal years
reflects (i) the introduction of new products and the Company's success in
cross-marketing new and existing products among its channels of distribution,
(ii) the Company's expansion of its market share through sales to additional
home improvement retailers, distributors, OEMs and specialty retail customers,
(iii) growth experienced by the Company's customers within the home improvement
market, particularly among national and regional home improvement retailers, and
(iv) growth of the home improvement market as a whole. Although consolidation of
the home improvement retail market could adversely affect gross profit margins,
the Company believes that national and regional home improvement retailers will
increasingly rely upon their larger suppliers to provide a broad array of
products accompanied by a high level of customer service. The Company believes
that its relationships with several large home improvement retailers, coupled
with its high level of customer service, have positioned the Company to become
one of the principal suppliers of specialty tools and related products to
national and regional home improvement retailers. The Company intends to pursue
additional growth in sales as it expands its product lines, continues marketing
to new customers and seeks to capitalize on the ongoing consolidation of the
home improvement retail market by national and regional home improvement
retailers.
According to industry information published by the National Home Center
News, the U.S. home improvement market generated retail sales of approximately
$116 billion and $132 billion in 1993 and 1995, respectively. Growth in the home
improvement market is expected to continue due to a variety of factors including
the aging of U.S. homes, increased housing turnover, favorable demographic
trends and increased consumer preference for larger, personalized homes. Within
the home improvement market, national and large regional home improvement
retailers have increased their market shares by offering broad product lines,
project advice and orientation, competitive pricing and aggressive promotions.
The Company's two largest customers, Home Depot and Lowe's, are the two largest
home improvement retailers in the country. The Company's five largest customers
in fiscal 1996 were among the ten largest home improvement retailers in the
United States. The Company anticipates that its largest customers will maintain
significant positions within the home improvement retail market by establishing
additional home centers, as evidenced by Home Depot's and Lowe's recent reports
of their intention to open 477 and 335 additional stores, respectively, by the
turn of the century.
The Company's strategy is to enhance its position as a leading manufacturer
and marketer of specialty tools and related products for the home improvement
market in order to capitalize on the continued expansion of its core markets and
growth experienced by its customer base. The Company intends to implement this
strategy by (i) increasing sales by broadening existing product lines and
securing new customers in its primary channels of distribution, (ii) continuing
its practice of cross-selling existing and new products among its channels of
distribution, (iii) addressing the requirements of its key customers by
maintaining its focus on customer service, quality control and enhancement of
information systems, (iv) acquiring additional manufacturers, distributors and
other companies which will complement the Company's operations, and (v)
expanding its foreign market presence through a recently introduced foreign
sales program.
The Company was incorporated in the State of New York in March 1979 and was
reincorporated in the State of Delaware in August 1996. Its principal executive
offices are located at 990 South Rogers Circle, Boca Raton, Florida 33487, and
its telephone number is (561) 994-5550.
3
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company................................. 1,000,000 shares
By the Selling Shareholders.................... 200,000 shares
Common Stock to be outstanding after this
offering....................................... 2,504,597 shares(1)
Use of proceeds.................................. To repay a bank credit facility, finance
growth in inventories and accounts
receivable, acquire complementary
businesses or product lines, make
capital improvements and for general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol.................... QEPC
</TABLE>
- ---------------
(1) Includes 4,597 shares of Common Stock to be issued in exchange for 183,889
shares of Preferred Stock as of the date of this Prospectus. Excludes
156,150 shares of Common Stock issuable upon the exercise of currently
outstanding options. See "Management -- Stock Option Plan" and "Description
of Securities."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS
---------------------------------- ENDED MAY 31,
FEB. 28, FEB. 28, FEB. 29, ------------------
1994 1995 1996 1995 1996
-------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales............................... $13,407 $19,247 $25,272 $5,681 $7,702
Gross profit............................ 4,991 7,142 9,295 2,008 2,901
Operating income........................ 1,015 1,303 1,931 481 751
Income before income taxes.............. 880 1,154 1,736 432 707
Net income.............................. 539 725 1,068 258 439
Net income per common share(1).......... $ .36 $ .47 $ .70 $ .17 $ .29
Weighted average shares outstanding..... 1,515 1,515 1,506 1,515 1,500
PRO FORMA DATA(2):
Operating income............................................... $ 1,931 $ 751
Net income..................................................... 1,144 459
Net income per share(1)........................................ $ .67 $ .28
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996
---------------------------
FEBRUARY 29, 1996 ACTUAL AS ADJUSTED(3)
------------------ ------ ----------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................... $2,931 $3,401 $ 12,026
Total assets............................. 7,880 7,818 14,755
Total liabilities........................ 4,455 3,961 2,273
Shareholders' equity..................... 3,425 3,857 12,482
</TABLE>
- ---------------
(1) Cash dividends on Preferred Stock are deducted from net income before
calculating net income per common share.
(2) Pro forma information gives effect to the sale of 168,799 shares of Common
Stock offered by the Company at an assumed offering price of $10.00 per
share and the application of the proceeds therefrom to repay an outstanding
bank credit facility as of May 31, 1996.
(3) Adjusted to reflect the sale of 1,000,000 shares of Common Stock by the
Company at an assumed offering price of $10.00 per share, and the
application of the estimated net proceeds therefrom. Gives effect to
repayment of $1,900,000 under the Company's credit facility, of which
$1,917,000 was outstanding as of July 31, 1996. See "Use of Proceeds."
4
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors prior to making
an investment in the Common Stock offered hereby.
CUSTOMER CONCENTRATION; DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company is dependent upon a limited number of customers for a
substantial portion of its net sales. Sales to the Company's ten largest
customers accounted for 86.5%, 74.9%, 76.5% and 77.0% of the Company's net sales
for the fiscal years ended February 28, 1994 and 1995 and February 29, 1996 and
the three months ended May 31, 1996, respectively. During the same periods,
sales to The Home Depot, Inc. ("Home Depot"), the Company's largest customer,
accounted for 54.5%, 46.1%, 51.5% and 49.9% of net sales, respectively, and
sales to The Lowe's Companies, Inc. ("Lowe's") accounted for 7.4%, 9.4%, 10.1%
and 11.9% of net sales, respectively. The Company has not entered into any
long-term contracts with any of its customers, nor is any customer obligated to
order additional products from the Company. Although Home Depot has been a
customer of the Company since 1986 and Lowe's has been a customer since 1993,
there is no assurance that the Company will be successful in maintaining these
relationships in the future. The loss of, or any material reduction in, orders
from the Company's significant customers for any reason could have a material
adverse effect on the Company's results of operations and financial condition,
and any reduction in sales to Home Depot or Lowe's would have a proportionately
greater negative impact on the Company's results of operations, financial
condition and the price of the Company's Common Stock. The Company will be
substantially dependent on sales to home improvement retailers such as Home
Depot and Lowe's for the foreseeable future. Changes in the financial condition
or results of operations of national home improvement retailers, or adverse
changes in the home improvement market, may adversely impact the Company's
results of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Relationship with Home Depot and Lowe's."
RELIANCE ON SUPPLIERS AND SALES AGENTS
The Company estimates that it purchases finished products from outside
suppliers comprising approximately 65% of the dollar amount of net sales and
approximately 45% of the Company's sales measured by unit volume in fiscal 1996.
The Company also purchases components from various suppliers which the Company
estimates accounted for 10% of the dollar amount of net sales and 15% of sales
measured by unit volume in fiscal 1996. The Company has not entered into written
agreements with any of its suppliers. Although the Company believes that
multiple sources of supply exist for nearly all of its products purchased from
outside suppliers, and although the Company generally maintains at least two
sources of supply for each product, the Company may be vulnerable to limits or
interruptions in supply or to price changes which could have a material adverse
effect on the Company's results of operations. The Company has identified
alternate suppliers for its finished products and components, except with
respect to the two power tools which are discussed below. During fiscal 1995,
the Company purchased finished products and components through two foreign sales
agents which resulted in 14.0% and 20.5% of the dollar amount of the Company's
net sales. In fiscal 1996, purchases through these two sales agents resulted in
7.9% and 16.3% of the dollar amount of the Company's net sales. The two foreign
sales agents utilized by the Company purchase finished products and components
from a number of manufacturers located in Taiwan, China, Japan and other
countries. The Company believes these sales agents purchased products from 10 to
12 different manufacturers in fiscal 1996. Although the Company is familiar with
a number of these manufacturers and believes it could purchase products directly
from them, sales agents will generally warehouse and consolidate products to
allow more cost effective shipping and will retain title pending arrival at
United States ports. While the Company believes there are a variety of sales
agents through which the Company could source its product requirements, changes
in sales agents could disrupt product shipments or result in manufacturing
delays until new suppliers or sales agents are procured.
The Company currently relies on two foreign suppliers as the sole sources
of supply for two power tools. The two power tools are currently among the
Company's five best selling products, and while sales of each accounted for less
than 5% of the Company's net sales in fiscal 1996, aggregate sales of these
products
5
<PAGE> 10
accounted for 7.6% of fiscal 1996 net sales. The Company believes that alternate
suppliers exist for these products and is currently attempting to locate such
alternative sources. However, the Company does not maintain sufficient inventory
to allow it to fill customer orders without interruption during the time that
would be required to obtain such alternate sources. Accordingly, an extended
interruption in the supply of these products could adversely affect the
Company's results of operations. See "Business -- Manufacturing and Suppliers."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon certain of its executive officers, the loss
of any one of whom could have a material adverse effect on the Company. In
particular, loss of the services of Lewis Gould, the Company's President and
Chief Executive Officer, would have a material adverse effect on the Company's
operations. Mr. Gould devotes a considerable portion of his time to the
maintenance of customer relationships with home improvement retailers, which
relationships are integral to the Company's continued sales growth. The Company
has a three-year employment agreement with Mr. Gould and maintains key-man life
insurance, renewable annually, in the amount of $2,500,000 on the life of Mr.
Gould. The existence of the employment agreement does not assure the Company of
the continued services of Mr. Gould. There also can be no assurance that the
proceeds from the life insurance policy would be sufficient to compensate the
Company in the event of Mr. Gould's death, and this policy does not provide the
Company benefits in the event Mr. Gould becomes disabled or is otherwise unable
to render services to the Company. The continued success of the Company also is
dependent upon its ability to attract and retain other highly qualified
personnel, of which there can be no assurance. See "Management -- Directors and
Executive Officers."
PRODUCTION FORECASTING; MANAGEMENT OF INVENTORY
The Company's customers generally place orders for home improvement
products with the Company on a weekly, semiweekly or monthly basis. The
Company's ability to fill customer orders promptly is directly related to the
accuracy of its production forecasts and the sufficiency of inventory to meet
anticipated product demand. The Company reviews its production requirements
weekly and generally places orders with its foreign suppliers at least 90 to 120
days in advance of the Company's anticipated manufacturing date. Although the
Company is generally able to update its orders placed with foreign suppliers 30
days prior to the commencement of production, the Company must anticipate
shipping time of approximately 30 days for products to be received from foreign
suppliers. The Company can generally obtain home improvement products from its
subsidiaries and domestic suppliers in less than 30 days from the date ordered.
If the Company misjudges market demand for a particular product, or in the event
the Company experiences manufacturing or shipment delays from suppliers, the
Company's delivery schedules may be disrupted. Inaccurate forecasts of customer
demand, restricted availability of finished or unfinished products, quality
control difficulties, carrier strikes or damage to products during manufacture
or shipment could result in a buildup of excess inventory or an inability to
deliver products on a timely basis. There can be no assurance that the Company's
production forecasts will accurately anticipate customer demand, or that the
Company's results of operations will not be adversely affected by costs
associated with excess inventory or loss of sales due to insufficient inventory.
See "Business."
COMPETITION
The market for specialty tools and related products is highly competitive.
Although the Company believes it is one of the more significant competitors in
the market segments in which it competes, a number of large, well-capitalized
home improvement product manufacturers could, should they so choose, market
products in direct competition with the Company. Although the Company is not
presently aware of any competitors with national distribution in all of its
major product groups, the Company is subject to competition from several strong
regional manufacturers and from large tool manufacturers within certain product
groups. The Company's entry into foreign markets will also subject it to
competition from a large number of foreign manufacturers, many of which may have
greater financial, marketing and other resources than the Company. The Company
believes that competition in the home improvement product market is based
primarily on retail
6
<PAGE> 11
gross profit margin potential, delivery, brand recognition, quality and
availability of shelf space. The Company believes that it competes favorably
particularly with respect to retail gross profit margin potential and delivery,
and to a lesser extent with respect to brand recognition and quality. There can
be no assurance that the Company will compete successfully in the future with
its present or potential competition.
The Company is aware that, from time to time, certain of its customers have
contacted one or more of the Company's foreign suppliers to discuss purchasing
home improvement products similar or identical to the Company's products
directly from these manufacturers. Management believes that these discussions
have not resulted in a loss of business by the Company to date. Although the
Company believes that its diversified product line, brand recognition and
customer service will continue to offer benefits unavailable from a foreign
manufacturer, the Company could experience competition from one or more foreign
manufacturers which now serve as suppliers to the Company. Increased competition
from these manufacturers or others could result in price reductions, reduced
margins or loss of market share, each of which could have a material adverse
effect on the Company's results of operations and financial condition. See
"Business -- Competition."
BROAD DISCRETION IN APPLICATION OF PROCEEDS; ACQUISITION STRATEGY
The Company has not designated a specific use for a significant portion of
the net proceeds from the sale of the Common Stock offered by the Company. The
Company intends to use a significant portion of the net proceeds for general
corporate purposes, including working capital, capital equipment and
acquisitions. The Company has experienced a 38% compound annual growth rate
since 1992 that has created significant working capital requirements. Should
this rapid growth rate continue, the Company may not be able to satisfy its
working capital needs with internally generated funds. Additionally, the Company
will continue to pursue opportunities to manufacture products or components
in-house in order to realize potential cost savings or quality improvements.
This strategy, as well as the general expansion and upgrading of corporate
facilities, will require the purchase of additional capital equipment.
The Company's acquisition strategy is based on identifying and acquiring
businesses engaged in the manufacturing of home improvement products and
components complementary to those now produced and marketed by the Company.
Acquisitions may require investment of operational and financial resources and
could require integration of dissimilar operations, assimilation of new
employees, diversion of management time and resources, increases in
administrative costs, potential loss of key employees of the acquired company
and additional costs associated with debt or equity financing. Any future
acquisition by the Company could have an adverse effect on the Company's results
of operations or could result in dilution to existing shareholders, including
those purchasing shares of Common Stock in this offering. There can be no
assurance that the Company will complete any acquisitions or that future
acquisitions will not materially and adversely affect the Company's results of
operations and financial condition. See "Use of Proceeds" and "Business."
PRODUCT SALES CONCENTRATION
During fiscal 1995 and fiscal 1996, sales of a single tile-related product
accounted for approximately 5% and 7% of the Company's total net sales,
respectively. Although sales of this product accounted for less than 5% of the
Company's net sales in the three months ended May 31, 1996, sales of this
product are expected to account for a material portion of the Company's sales
during fiscal 1997. In addition, sales of one of the Company's power tools
accounted for approximately 5% of the Company's net sales in the three months
ended May 31, 1996. A decline in the demand for either of these products,
whether as a result of competition or other factors, could have a material
adverse effect on the Company's results of operations and financial condition.
There is no assurance that products on which the Company depends for a material
portion of its sales will continue to receive market acceptance. See
"Business -- Products."
LENGTHY SALES CYCLE TO NEW RETAIL CUSTOMERS
The Company's retail customers, which include national and regional home
improvement retailers and both chain and independent hardware, tile, carpet and
paint stores, generally have limited shelf space in which to place home
improvement products manufactured by the Company or others. Moreover, within the
tile, carpet, masonry, drywall and painting departments, the home improvement
retailer or other customer typically
7
<PAGE> 12
purchases only one or two lines of home improvement tools and related products.
As a result, the Company's ability to displace another manufacturer's product
line depends upon the Company presenting price, gross margin, product line,
product utility, brand image or other information which demonstrates the benefit
of a change in manufacturers. Accordingly, the Company has experienced lengthy
sales cycles of as much as one to three years before penetrating certain home
improvement retailers and other retail customer accounts. Although the Company
believes that the diversity of its product line, pricing and brand image will
enable the Company to secure new retail customer accounts, the Company's
marketing personnel and other executive officers may be required to expend
substantial time and effort in marketing to new retail customers, the results of
which efforts cannot be assured. See "Business."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Although the Company's foreign sales accounted for less than 1% of net
sales in the fiscal year ended February 29, 1996 and in the three months ended
May 31, 1996, the Company anticipates that international sales will increase as
a percentage of net sales in the future. International sales are subject to
inherent risks, including variations in local economies, fluctuating exchange
rates, increased difficulty of inventory management, greater difficulty in
accounts receivable collection, costs and risks associated with localizing
products for foreign countries, changes in tariffs and other trade barriers,
adverse foreign tax consequences, cultural differences affecting product demand,
and burdens of complying with a variety of foreign laws. There is no assurance
that these factors will not have a material adverse impact on the Company's
ability to increase its international sales. A substantial portion of the
Company's finished products and components purchased from foreign suppliers are
acquired from entities based in Taiwan, China and Japan. During fiscal 1995 and
1996, the Company estimates that purchases of finished products and components
from foreign suppliers accounted for 38.3% and 29.9%, respectively, of total
unit purchases from outside suppliers. Purchases from foreign suppliers subject
the Company to additional risks including, among others, imposition of quotas or
trade sanctions, fluctuations in the value of the U.S. dollar against local
currencies causing an effective increase in the cost of finished products and
components, and shipment delays. The Company does not presently hedge against
adverse foreign currency fluctuations. See "Business."
RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITIES
In the fiscal year ending February 28, 1997, the Company anticipates
consolidating its manufacturing, warehousing and executive offices located in
Boca Raton, Florida and Pompano Beach, Florida into one facility, and will be
relocating the manufacturing operations of a subsidiary now located in Carson
City, Nevada to the new Florida facility. The Company is currently negotiating
the lease terms for its Florida facility. While the Company's new facility will
provide added manufacturing capacity and is expected to allow the Company to
realize certain administrative cost savings, the Company may experience delays
in all aspects of its operations and substantial unanticipated costs in the
relocation of this facility. There can be no assurance the Company will not
encounter quality or capacity difficulties, or experience production delays, in
connection with the relocation. These factors could have an adverse short-term
effect on the Company's results of operations. See "Business -- Facilities."
ENVIRONMENTAL MATTERS
Federal, state and local regulations impose various environmental controls
on the storage, handling, discharge and disposal of certain materials used in
the Company's manufacturing facilities. The Company believes that its activities
conform to present environmental regulations. Increasing public attention has,
however, been focused on the environmental impact of many businesses. Although
the Company has not experienced any material adverse effect on its operations
from environmental regulations, there can be no assurance that changes in such
regulations will not impose the need for additional capital equipment or other
requirements that could restrict the Company's ability to maintain or expand its
operations. Any failure by the Company to adequately restrict the discharge of
hazardous substances could subject the Company to future liabilities or could
cause its manufacturing operations to be suspended. See
"Business -- Environmental Matters."
8
<PAGE> 13
The Company is subject to provisions of the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and similar state statutes,
which subject certain classes of persons, including generators of hazardous
substances, to claims for response costs by federal and state agencies,
regardless of fault or the legality of original disposal. Marion Tool Company,
one of the Company's subsidiaries, has been named as a potentially responsible
party for the clean up of contamination from historic disposal of hazardous
wastes at an off-site location. Based on currently available information, the
Company believes that the ultimate allocation of costs associated with the
investigation and remediation of this site will not have a material adverse
effect on the Company's financial condition. Until Marion Tool Company's
proportionate share of costs is determined at this site, there can be no
assurance that clean up costs will not have a material adverse effect on the
Company's results of operations or financial condition. Although the Company
does not believe that Marion Tool Company has other potential off-site
liability, if other disposal sites where Marion Tool Company sent waste are
determined to require cleanup under CERCLA or other laws, Company could face
similar claims in the future. See "Business -- Environmental Matters."
SHARES ELIGIBLE FOR FUTURE SALE; RIGHTS TO ACQUIRE SHARES
Following this offering, 1,300,000, or 51.9%, of the Company's outstanding
shares of Common Stock held by officers, directors and shareholders, will be
"restricted securities" and may in the future be sold upon registration or in
compliance with an exemption from registration such as Rule 144 adopted under
the Act. Rule 144 generally provides that beneficial owners of shares who have
held such shares for two years may sell within a three-month period a number of
shares not exceeding the greater of 1% of the total outstanding shares or the
average weekly trading volume of the shares during the four calendar weeks
preceding such sale. In the absence of agreements with the Representative of the
Underwriters (the "Representative"), the outstanding restricted shares of Common
Stock could be sold in accordance with Rule 144 commencing 90 days from the date
of this Prospectus. Pursuant to the terms of the Underwriting Agreement, the
Representative has required that sales of the outstanding restricted shares of
Common Stock (other than shares to be sold by the Selling Shareholders
hereunder) may not commence until nine months from the date of this Prospectus,
without the prior written consent of the Representative. Future sales of
restricted shares of Common Stock under Rule 144 or otherwise could negatively
impact the market price of the Common Stock. See "Shares Eligible For Future
Sale."
At the date of this Prospectus, the Company has reserved 250,000 shares of
Common Stock for issuance on exercise of options granted under its stock option
plan. Options to purchase 156,150 shares were outstanding at June 30, 1996. The
exercise prices of the options outstanding range from $8.50 to $9.35 per share.
At the completion of this offering, the Representative will receive warrants
(the "Representative's Warrants") to purchase 120,000 shares of Common Stock at
an exercise price of $ (120% of the offering price of the Common Stock)
during a period of four years commencing one year from the date of this
Prospectus. During the terms of the outstanding options and the Representative's
Warrants, the holders of such securities may profit from a rise in the market
price of the Common Stock, and their exercise may dilute the ownership interest
of existing shareholders, including investors in this offering. The existence of
options and the Representative's Warrants may adversely affect the terms on
which the Company may obtain additional equity financing. Moreover, the holders
of such securities are likely to exercise their rights to acquire Common Stock
at a time when the Company would otherwise be able to obtain capital on terms
more favorable than could be obtained through the exercise of such securities.
See "Management -- Stock Option Plan" and "Underwriting."
CONTROL BY MAJORITY SHAREHOLDER; BENEFITS TO RELATED PARTIES
Following this offering, Lewis Gould, the Company's President and Chief
Executive Officer, will beneficially own approximately 35.3% of the Company's
outstanding shares of Common Stock. Moreover, by virtue of a voting trust
agreement with Susan J. Gould, Mr. Gould will have the power to vote
approximately 51.8% of the outstanding shares of Common Stock. As a result, Mr.
Gould will have a significant influence upon the activities of the Company, as
well as on all matters requiring approval of the shareholders, including the
election of a majority of the directors. The voting power of Mr. Gould under
certain circumstances could
9
<PAGE> 14
have the effect of delaying or preventing a change in control of the Company.
Lewis Gould and Susan J. Gould, both of whom are officers, directors and
principal shareholders, are the Selling Shareholders and will sell 200,000
shares of Common Stock in this offering. Lewis Gould will also receive an
indirect benefit from the use of a portion of the proceeds of this offering to
reduce the outstanding balance of the Company's bank credit facility, as to
which Mr. Gould has provided a limited personal guarantee. See "Management" and
"Principal and Selling Shareholders."
RIGHTS OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of up to
2,500,000 shares of Preferred Stock. The Preferred Stock may be issued in series
with the material terms of any series determined by the Board of Directors. As
of the date of this Prospectus, the Company has 319,158 shares of Series A
Preferred Stock issued and outstanding. Holders of the Series A Preferred Stock
are entitled to receive semi-annual dividends on a cumulative basis at the rate
of $0.035 per share per annum through September 30, 2000, and at a variable rate
thereafter equal to the prime interest rate on the first day of the month in
which the dividends are payable, less 1 1/4%. None of the outstanding Preferred
Stock has any voting rights. In the event of a liquidation of the Company, the
liquidation preference of the outstanding Preferred Stock would reduce the
amount of assets available for distribution to holders of the Common Stock. The
Series A Preferred Stock was issued in connection with an acquisition in fiscal
1995. In the future, the Company could issue additional series of Preferred
Stock for the purpose of undertaking additional acquisitions. In such event, any
additional series of Preferred Stock may carry dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or other rights of holders of the Common Stock. Preferred Stock issued with
anti-takeover provisions may prevent holders of Common Stock from receiving a
premium for their shares in connection with a tender offer. Further, the
Preferred Stock may be issued with voting, conversion or other terms determined
by the Board of Directors which could be used to delay, discourage or prevent a
change in control of the Company. See "Description of Securities."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. Except as discussed below, the Company intends
to retain profits, if any, to fund growth and expansion. The terms of the
Company's bank credit facility currently prohibit the payment of dividends
except with the lender's consent. The Company is obligated to pay cumulative
dividends on the Series A Preferred Stock, for which the lender's consent has
been obtained in the past. See "Dividend Policy" and "Description of
Securities."
DILUTION
This offering will result in immediate substantial dilution of $5.04
(50.4%) per share, which amount represents the difference between the pro forma
net tangible book value per share after the offering and the assumed public
offering price of $10.00 per share. See "Dilution."
OFFERING PRICE DETERMINATION; ABSENCE OF PUBLIC MARKET
The public offering price of the Common Stock has been determined by
negotiations among the Company, the Selling Shareholders and the Representative
and does not necessarily bear any relationship to assets, book value, earnings
history or other investment criteria. Prior to this offering, there has been no
public market for the Company's Common Stock. Although the Common Stock is
expected to be approved for quotation on the Nasdaq National Market upon notice
of issuance, there can be no assurance that an active trading market will
develop or that the market price of the Common Stock will not decline below the
public offering price. See "Underwriting."
10
<PAGE> 15
FLUCTUATIONS IN QUARTERLY RESULTS
The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors including, among others,
announcements by the Company or its competitors of the development or
termination of customer relationships, changes in raw material and manufacturing
costs, timely delivery of products, pricing trends in the home improvement
market or the specialty tool segment of the tool industry, the amount and
pricing of international sales, foreign currency exchange rates, significant
increases in product returns and allowances, variations in results of operations
of national home improvement retailers, changes in the home improvement market,
general economic conditions or other factors. These factors or market conditions
in general may cause the market price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market has experienced
significant price and volume fluctuations. These fluctuations, which are often
unrelated to the operating performance of specific companies, have had a
substantial effect on the market price for many small capitalization companies.
Factors such as those cited above, as well as other factors which may be
unrelated to the operating performance of the Company, may adversely affect the
price of the Common Stock. See "Business" and "Underwriting."
LIMITATION OF LIABILITY
The Company's Certificate of Incorporation provides that directors of the
Company shall not be personally liable for monetary damages to the Company or
its shareholders for a breach of fiduciary duty as a director, subject to
limited exceptions. Although such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission, the
presence of these provisions in the Certificate of Incorporation could prevent
the recovery of monetary damages against directors of the Company. See
"Management -- Limitation of Liability and Indemnification."
11
<PAGE> 16
USE OF PROCEEDS
Based on an assumed offering price of $10.00 per share, the net proceeds
from the sale of the 1,000,000 shares of Common Stock offered by the Company are
estimated to be approximately $8,625,000 ($10,236,000 if the Underwriters'
over-allotment option is fully exercised). The Company will not receive any
proceeds from the sale of shares by the Selling Shareholders.
The Company expects to use $1,900,000 of the net proceeds to reduce the
outstanding balance under its revolving bank credit facility. The balance
outstanding under the credit facility was $1,917,000 as of July 31, 1996.
Advances under the credit facility bore interest at variable rates equal to
7 1/4% and 8 1/4% at May 31, 1996, and have been used primarily to finance
inventory purchases and accounts receivable. In addition, the Company expects
that approximately $1.2 million will be used for capital improvements, including
expansion and upgrading of existing facilities and the purchase or lease of
additional manufacturing equipment. The Company intends to use the remaining net
proceeds for working capital and general corporate purposes, including the
possible investment in, strategic acquisition of, or joint ventures with,
businesses, as well as the possible acquisition of other product lines. The
Company expects to seek acquisitions of specialty tool and component
manufacturers, distributors and other companies which will complement the
Company's business, products, distribution channels and brand names. Although
the Company is continually evaluating potential acquisitions, the Company
currently has no agreements, understandings or commitments with respect to any
acquisition, nor is the Company engaged in negotiations with respect to any
acquisition. There can be no assurance that any acquisitions will become
available on terms acceptable to the Company.
The foregoing represents the Company's best estimate of the use of the net
proceeds to be received in this offering based on current planning and business
conditions. The Company reserves the right to change such uses when and if
market conditions or unexpected changes in operating conditions or results
occur. The amounts actually expended for each use may vary significantly
depending upon a number of factors, including future growth and the amount of
cash generated by the Company's operations. The Company believes that its
existing capital resources and the net proceeds of this offering will be
sufficient to maintain its current and planned operations for a period of at
least 12 months from the date of this Prospectus. Net proceeds not immediately
required for the purposes described above will be invested principally in U.S.
government securities, short-term certificates of deposit, money market funds or
other short-term, interest-bearing securities.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends or distributions on
its Common Stock. The Company anticipates that for the foreseeable future all
earnings will be retained for use in the Company's business and no cash
dividends will be paid on the Common Stock. Any payment of cash dividends in the
future on the Common Stock will be dependent upon the Company's financial
condition, results of operations, current and anticipated cash requirements,
plans for expansion and restrictions, if any, under debt obligations, as well as
other factors that the Board of Directors deems relevant. The Company's current
bank credit facility prohibits the payment of dividends except with the lender's
consent.
During the year ended February 29, 1996, the Company paid cash dividends in
the amount of $13,653 and $6,250 to the holders of its Series A and Series B
Preferred Stock, respectively. Dividends in the amount of $600 were declared in
fiscal 1996 on the Series C Preferred Stock. Based on the shares of Class A
Preferred Stock outstanding on the date of this Prospectus, the Company's
aggregate annual dividend requirement approximates $10,000, assuming dividends
are declared on an annual basis. See "Description of Securities."
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<PAGE> 17
DILUTION
As of May 31, 1996, the Company had a net tangible book value of $3,735,000
or $2.48 per share based on 1,504,597 shares of Common Stock outstanding
(assuming the issuance of 4,597 shares of Common Stock in exchange for certain
shares of Preferred Stock). After giving effect to the sale of the 1,000,000
shares of Common Stock offered by the Company at the assumed offering price of
$10.00 per share, the pro forma net tangible book value of the Company as of May
31, 1996 would have been $12,420,000, or $4.96 per share. This amount represents
an immediate increase in net tangible book value of $2.48 per share to the
existing holders of Common Stock and an immediate dilution of $5.04 per share to
new investors. "Dilution" is determined by subtracting pro forma net tangible
book value per share after the offering from the assumed offering price per
share of Common Stock, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $10.00
Net tangible book value per share as of May 31, 1996...... $2.48
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.48
-----
Pro forma net tangible book value per share after the
offering.................................................. 4.96
------
Dilution per share to new investors......................... $ 5.04
======
</TABLE>
The following table sets forth as of May 31, 1996, the number of shares of
Common Stock purchased for cash, the total consideration paid and the average
cash price per share paid by existing shareholders and by new investors
(assuming the sale of 1,000,000 shares of Common Stock by the Company at the
assumed offering price of $10.00 per share, before deduction of underwriting
discounts and other estimated offering expenses, and issuance of 4,597 shares of
Common Stock in exchange for 183,889 shares of Preferred Stock):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)(2)................ 1,504,597 60.1% $ 3,857,038 27.8% $ 2.56
New investors(2)........................... 1,000,000 39.9 10,000,000 72.2 $10.00
--------- ----- ----------- -----
Total............................ 2,504,597 100.0% $13,857,038 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Includes Common Stock of $1,505, Preferred Stock of $319,158, additional
paid-in capital of $214,646 and retained earnings of $3,379,629, less
treasury stock of $57,900.
(2) The sale of 200,000 shares by the Selling Shareholders in this offering will
reduce the number of shares held by existing shareholders to 1,304,597, or
52.1% of the total shares of Common Stock outstanding, and will increase the
number of shares held by new investors to 1,200,000, or 47.9% of the total
shares of Common Stock outstanding after this offering. See "Principal and
Selling Shareholders."
The foregoing information assumes no exercise of the over-allotment option,
no exercise of outstanding options to purchase an aggregate of 156,150 shares of
Common Stock, and no exercise of the Representative's Warrants. See
"Management -- Stock Option Plan," "Description of Securities" and
"Underwriting." To the extent that currently outstanding options or warrants are
exercised, there will be further dilution to new investors.
13
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1996, and as adjusted to give effect to the sale of shares of Common Stock
offered by the Company at an assumed offering price of $10.00 per share (and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company).
<TABLE>
<CAPTION>
MAY 31, 1996
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Bank credit facility(1)................................................. $1,688 $ --
------ -------
Long-term liabilities................................................... 135 135
------ -------
Shareholders' equity:
Preferred Stock, par value $1.00 per share;
2,500,000 shares authorized; 503,047 issued
and outstanding, 319,158 shares issued
and outstanding, as adjusted(2).................................... 503 319
Common Stock, par value $.001 per share;
10,000,000 shares authorized; 1,500,000
shares issued and outstanding, 2,504,597
shares issued and outstanding, as adjusted(2)(3)................... 1 2
Additional paid in capital............................................ 31 8,839
Retained earnings..................................................... 3,380 3,380
Cost of stock held in treasury........................................ (58) (58)
------ -------
Total shareholders' equity............................................ 3,857 12,482
------ -------
Total capitalization............................................... $5,680 $12,617
====== =======
</TABLE>
- ---------------
(1) The Company will use $1,900,000 of the net proceeds of this offering to
reduce the outstanding balance under the bank credit facility, which at July
31, 1996 totaled $1,917,000.
(2) Gives effect to the issuance of 4,597 shares of Common Stock in exchange for
183,889 shares of Preferred Stock as of the date of this Prospectus. See
"Description of Securities."
(3) Excludes 156,150 shares of Common Stock issuable on exercise of outstanding
options at June 30, 1996. See "Management -- Stock Option Plan" and
"Description of Securities."
14
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and related Notes thereto appearing
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected financial data as
of February 28, 1994 and 1995 and February 29, 1996 and for each of the three
years in the period ended February 29, 1996 have been derived from the
consolidated financial statements of the Company which have been audited by the
Company's independent auditors and are included elsewhere in this Prospectus.
The selected financial data as of February 29, 1992 and February 28, 1993 and
for each of the two years in the period ended February 28, 1993 have been
derived from the audited financial statements of the Company not included
herein. The selected financial data as of May 31, 1995 and 1996 and for the
three-month periods ended May 31, 1995 and 1996 have been derived from the
Company's unaudited financial statements which, in the opinion of management,
reflect all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the results for these periods and as of
such dates. The selected financial data provided below is not necessarily
indicative of the future results of operations or financial performance of the
Company.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED FEBRUARY 28 OR 29, ENDED MAY 31,
------------------------------------------------------ -----------------
STATEMENT OF INCOME DATA: 1992 1993 1994 1995 1996 1995 1996
------ ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................................... $6,966 $10,188 $13,407 $19,247 $25,272 $5,681 $7,702
Cost of goods sold.................................. 4,389 6,459 8,416 12,105 15,977 3,673 4,801
------ ------- ------- ------- ------- ------ ------
Gross profit........................................ 2,577 3,729 4,991 7,142 9,295 2,008 2,901
Shipping............................................ 893 1,123 1,113 1,488 1,746 235 565
General and administrative.......................... 850 1,137 1,492 2,436 3,106 734 767
Selling and marketing............................... 712 905 1,218 1,800 2,512 558 818
Foreign exchange (gains) losses..................... (70) 10 153 115 -- -- --
------ ------- ------- ------- ------- ------ ------
Total expenses.............................. 2,385 3,175 3,976 5,839 7,364 1,527 2,150
------ ------- ------- ------- ------- ------ ------
Operating income.................................... 192 554 1,015 1,303 1,931 481 751
Interest expense.................................... 88 123 135 149 195 49 44
------ ------- ------- ------- ------- ------ ------
Income before provision for
income taxes and cumulative
effect of change in accounting
principle......................................... 104 431 880 1,154 1,736 432 707
Provision for income taxes.......................... 54 176 341 429 668 174 268
------ ------- ------- ------- ------- ------ ------
Income before cumulative effect
of change in accounting principle ................ 50 255 539 725 1,068 258 439
Cumulative effect of change in accounting for income
taxes(1).......................................... -- 57 -- -- -- -- --
------ ------- ------- ------- ------- ------ ------
Net income.......................................... $ 50 $ 312 $ 539 $ 725 $ 1,068 $ 258 $ 439
====== ======= ======= ======= ======= ====== ======
Net income per common share(2)...................... $ .03 $ .21 $ .36 $ .47 $ .70 $ .17 $ .29
====== ======= ======= ======= ======= ====== ======
Weighted average number of shares of common stock
outstanding....................................... 1,515 1,515 1,515 1,515 1,506 1,515 1,500
====== ======= ======= ======= ======= ====== ======
Pro forma net income per share(2)(3)................ $ .67 $ .28
======= ======
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29, MAY 31,
------------------------------------------------------ -----------------
BALANCE SHEET DATA: 1992 1993 1994 1995 1996 1995 1996
------ ------- ------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital..................................... $ 96 $ 404 $ 1,019 $ 1,948 $ 2,931 $2,234 $3,401
Total assets........................................ 2,464 3,535 4,133 6,000 7,880 6,179 7,818
Total liabilities................................... 2,105 2,864 2,798 3,502 4,455 3,435 3,961
Shareholders' equity................................ 359 671 1,335 2,498 3,425 2,744 3,857
</TABLE>
- ---------------
(1) The Company adopted in 1993 the method of accounting for income taxes
pursuant to Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes.
The Company had previously accounted for deferred income taxes pursuant to
Statement of Financial Accounting Standards No. 96, which was superseded by
SFAS No. 109. The Company elected to report the $57,200 cumulative effect on
prior years as an increase to 1993 income.
(2) Cash dividends on Preferred Stock are deducted from net income per common
share.
(3) Pro forma information gives effect to the sale of 168,799 shares of Common
Stock offered by the Company at an assumed offering price of $10.00 per
share and the application of the proceeds therefrom to repay an outstanding
bank credit facility as of May 31, 1996.
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company manufactures, markets and distributes a broad line of specialty
tools and related products for the home improvement market. The Company markets
over 4,000 products used primarily for surface preparation and installation of
ceramic tile, carpet, marble, masonry, drywall and paint. The Company's products
are sold through home improvement retailers, specialty distributors, original
equipment manufacturers and chain or independent hardware, tile, carpet and
painting retailers for use by the do-it-yourself consumer as well as the
construction or remodeling professional.
The Company attributes its growth in sales and earnings to increased market
penetration which has been achieved through additions to its product lines,
expansion of its customer base in each of its channels of distribution, and its
success in cross-selling existing and new product lines among its channels of
distribution. See "Business -- Introduction." Management estimates that the
Company's net sales through its primary distribution channels in fiscal 1996
were as follows: 70% through national and regional home improvement retailers,
13% through specialty distributors, 10% to chain or independent retailers in the
hardware, tile, carpet and paint markets and 7% to OEMs.
The Company's strategic acquisitions of specialty tool manufacturers and
distributors have also contributed to increased sales. The Company acquired
O'Tool Company and Marion Tool Company in June and October of 1994,
respectively, and acquired the Andrews Tools Company in January 1995
(collectively, the "Acquired Companies"). The acquisition of O'Tool Company was
funded with cash and promissory notes, which have since been paid in full. The
acquisitions of Andrews Tools Company and Marion Tool Company were funded
primarily through the issuance of Preferred Stock. See "Business" and Notes to
Consolidated Financial Statements.
As national home improvement retailers have consolidated the home
improvement retail market, the Company has become increasingly dependent upon a
limited number of customers. In fiscal 1996, the Company's five largest
customers were among the ten largest home improvement retailers in the United
States. Sales to the Company's ten largest customers accounted for 74.9%, 76.5%
and 77.0% of the Company's net sales for fiscal 1995, fiscal 1996 and the three
months ended May 31, 1996, respectively. Sales to Home Depot accounted for
46.1%, 51.5% and 49.9% of net sales in fiscal 1995, fiscal 1996 and the three
months ended May 31, 1996, respectively, while sales to Lowe's accounted for
9.4%, 10.1% and 11.9% during the same periods, respectively. The Company
anticipates that sales to national home improvement retailers will continue to
constitute a significant portion of the Company's total net sales in future
periods. See "Risk Factors -- Customer Concentration; Dependence on Significant
Customers."
The Company's net sales consist of gross sales less the amount of cash
discounts, returns and allowances. Cash discounts, returns and allowances vary
from year to year, and were 3.4% for fiscal 1996 and 4.6% for the three months
ended May 31, 1996. Sale terms generally are net 30 days. Sales are recognized
when products are shipped.
16
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Company's Consolidated
Statements of Income:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY THREE MONTHS
28 OR 29, ENDED MAY 31,
-------------------------- ----------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............................. 62.8 62.9 63.2 64.7 62.3
------ ------ ------ ------ ------
Gross profit.................................... 37.2 37.1 36.8 35.3 37.7
------ ------ ------ ------ ------
Shipping........................................ 8.3 7.7 6.9 4.1 7.3
General and administrative...................... 11.1 12.6 12.3 12.9 10.0
Selling and marketing........................... 9.1 9.4 10.0 9.8 10.6
Foreign exchange losses......................... 1.1 0.6 -- -- --
------ ------ ------ ------ ------
Total expenses.................................. 29.6 30.3 29.2 26.8 27.9
------ ------ ------ ------ ------
Operating income................................ 7.6 6.8 7.6 8.5 9.8
Interest expense................................ 1.0 0.8 0.7 0.9 0.6
------ ------ ------ ------ ------
Income before provision for income taxes........ 6.6 6.0 6.9 7.6 9.2
Provision for income taxes...................... 2.6 2.2 2.7 3.1 3.5
------ ------ ------ ------ ------
Net income...................................... 4.0 3.8 4.2 4.5 5.7
====== ====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MAY 31, 1996 AND 1995
Net sales for the three months ended May 31, 1996 (the "fiscal 1997
period") were $7,702,000 compared to $5,681,000 in the same three months of the
prior fiscal year (the "fiscal 1996 period"), an increase of $2,021,000 or
35.6%. The increase was primarily due to growth in sales to home improvement
retailers in the amount of $1,761,000, which was achieved through the
introduction of new products in late fiscal 1996 as well as an increase in the
number of stores operated by the Company's home improvement customers. Sales to
specialty distributors increased during the fiscal 1997 period by $239,000 as a
result of the Acquired Companies' improved operating efficiencies resulting in
more timely shipments of customer orders.
Gross profit for the fiscal 1997 period was $2,901,000 compared to
$2,008,000 in the fiscal 1996 period, an increase of $893,000 or 44.5%. As a
percentage of sales, gross profit increased to 37.7% in the fiscal 1997 period
from 35.3% in the fiscal 1996 period. The increase in gross profit margin was
due to the Company's ability to secure lower cost foreign suppliers and achieve
volume discounts with existing suppliers as a result of increased purchasing
levels.
Shipping expenses for the fiscal 1997 period were $565,000 compared to
$235,000 for the fiscal 1996 period, an increase of $330,000 or 140.4%. As a
percentage of sales, these expenses increased to 7.3% in the fiscal 1997 period
from 4.1% in the fiscal 1996 period. The increase in these expenses was due to a
higher number of shipments per sales dollar and an increase in the number of
retail locations to which shipments were made.
General and administrative expenses for the fiscal 1997 period were
$767,000 compared to $734,000 for the fiscal 1996 period, an increase of $33,000
or 4.5%. As a percentage of sales, these expenses decreased to 10.0% in the
fiscal 1997 period from 12.9% in the fiscal 1996 period due to a reduction in
administrative staff.
Selling and marketing expenses for the fiscal 1997 period were $818,000
compared to $558,000 for the fiscal 1996 period, an increase of $260,000 or
46.6%. As a percentage of sales, these expenses increased to 10.6% in the fiscal
1997 period from 9.8% in the fiscal 1996 period. The increase was primarily
attributable to an increase in the number of retail customers participating in
the Company's co-op advertising program, as well as an increase in the co-op
advertising costs borne by the Company with respect to certain retail customers.
An increase in sales and marketing personnel, particularly in the western United
States, also contributed to the increase in these expenses.
17
<PAGE> 22
Interest expense for the fiscal 1997 period was $44,000 compared to $49,000
for the fiscal 1996 period, a decrease of $5,000 or 10.2%. As a percentage of
sales, these expenses decreased to 0.6% in the fiscal 1997 period from 0.9% in
the fiscal 1996 period.
Provision for income taxes was $268,000 for the fiscal 1997 period compared
to $174,000 for the fiscal 1996 period, an increase of $94,000 or 54.0%. The
effective tax rate was approximately 37.9% in the fiscal 1997 period as compared
to 40.2% in the fiscal 1996 period. The change in the effective tax rate
reflects a reduction in the provision for income taxes in the 1997 period based
upon the most recent effective tax rates.
As a result of the above, net income for the fiscal 1997 period was
$439,000 compared to $258,000 for the fiscal 1996 period, an increase of
$181,000 or 70.2%. This represents an increase in net income as a percentage of
net sales to 5.7% in the fiscal 1997 period from 4.5% in the fiscal 1996 period.
YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
Net sales for fiscal 1996 were $25,272,000 compared to $19,247,000 in
fiscal 1995, an increase of $6,025,000 or 31.3%. The increase was attributable
to new product offerings, increased sales to home improvement retailers and a
full year of sales by the Acquired Companies. Sales to the Company's two largest
customers increased by $4,862,000, a majority of which was attributable to an
increase in retail store locations. A portion of the increase in sales to these
customers was attributable to sales of new products introduced during the third
quarter of fiscal 1996, which on a Company-wide basis totaled $1,926,000. The
addition of a national home improvement customer accounted for $364,000 of the
net sales increase, while a full year of sales attributable to the Acquired
Companies increased net sales by $1,153,000. These increases were partially
offset by reduced sales to smaller customers affected by the consolidation of
the home improvement industry.
Gross profit for fiscal 1996 was $9,295,000 compared to $7,142,000 in
fiscal 1995, an increase of $2,153,000 or 30.1%. As a percentage of sales, gross
profit decreased to 36.8% in fiscal 1996 from 37.1% in fiscal 1995. The decrease
in gross profit margin was attributable to the introduction of two new products
which accounted for $1,926,000 in net sales during fiscal 1996. The lower profit
margin on these products and other shifts in the product mix resulted in a net
reduction in the gross profit margin of 0.3%.
Shipping expenses for fiscal 1996 were $1,746,000 compared to $1,488,000 in
fiscal 1995, an increase of $258,000 or 17.3%. As a percentage of sales, these
expenses decreased to 6.9% in fiscal 1996 from 7.7% in fiscal 1995 due to
economies of scale and more efficient use of the Acquired Companies' shipping
and warehouse facilities.
General and administrative expenses for fiscal 1996 were $3,106,000
compared to $2,436,000 in fiscal 1995, an increase of $670,000 or 27.5%. As a
percentage of sales, these expenses decreased to 12.3% in fiscal 1996 from 12.6%
in fiscal 1995. Of the dollar increase, $140,000 represented increased rent and
payroll costs of the Acquired Companies, $130,000 represented increased
professional fees in connection with financing and other corporate matters,
$81,000 represented increased bad debt expense, of which $53,000 was due to the
insolvency of two customers, and $50,000 represented increased discretionary
contribution to the employee profit sharing plan. The remaining increase was
attributable to additional general and administrative expenses of the Acquired
Companies.
Selling and marketing expenses for fiscal 1996 were $2,512,000 compared to
$1,800,000 for fiscal 1995, an increase of $712,000 or 39.6%. As a percentage of
sales, these expenses increased to 10.0% in fiscal 1996 from 9.4% in fiscal
1995. The increase was primarily attributable to the Company's integration of
the sales and marketing functions of the Acquired Companies. In particular, the
Company incurred certain costs to publish catalogues and sales materials for the
Acquired Companies and to hire sales and marketing employees during fiscal 1996
who had not yet achieved the productivity level of existing employees.
Interest expense for fiscal 1996 was $195,000 compared to $149,000 in
fiscal 1995, an increase of $46,000 or 30.9%. As a percentage of sales, these
expenses decreased to 0.7% in fiscal 1996 from 0.8% in fiscal 1995. The dollar
increase in interest expense was attributable to increased borrowings on the
line of credit required to finance the Company's growth. The decrease in dollar
expense as a percentage of sales was attributable to the Company's ability to
fund growth with a relatively lower level of borrowing.
18
<PAGE> 23
Provision for income taxes in fiscal 1996 was $668,000 compared to $429,000
in fiscal 1995, an increase of $239,000 or 55.7%. The effective tax rate
increased to 38.5% in fiscal 1996 from 37.2% in fiscal 1995. The increase in the
effective tax rate is primarily attributable to the non-tax deductible expenses.
As a result of the above, net income in fiscal 1996 was $1,068,000 compared
to $725,000 in fiscal 1995, an increase of $343,000 or 47.3%. This represents an
increase in net income as a percentage of net sales to 4.2% in fiscal 1996 from
3.8% in fiscal 1995.
YEARS ENDED FEBRUARY 28, 1995 AND FEBRUARY 28, 1994
Net sales were $19,247,000 in fiscal 1995 compared to $13,407,000 in fiscal
1994, an increase of $5,840,000 or 43.6%. The Acquired Companies, all of which
were acquired in fiscal 1995, contributed a total of $3,238,000 to net sales
during fiscal 1995. In addition, net sales to the Company's seven largest home
improvement customers increased by $2,291,000 during fiscal 1995 due primarily
to new store openings.
Gross profit for fiscal 1995 was $7,142,000 compared to $4,991,000 in
fiscal 1994, an increase of $2,151,000 or 43.1%. Gross profit as a percentage of
sales decreased to 37.1% in fiscal 1995 from 37.2% in fiscal 1994. The slightly
lower gross profit margin in fiscal 1995 was partially attributable to certain
operating inefficiencies which existed in the Acquired Companies. Subsequent to
each acquisition, the Company has taken steps to address such inefficiencies.
Shipping expenses during fiscal 1995 were $1,488,000 compared to $1,113,000
in fiscal 1994, an increase of $375,000 or 33.7%. As a percentage of sales,
these expenses decreased to 7.7% in fiscal 1995 from 8.3% in fiscal 1994 The
reduction in these expenses as a percentage of sales was attributable to the
consolidation of two distribution facilities located in California and the
closing of a distribution facility located in New York. Redesign of the
Company's distribution facilities and operating procedures during fiscal 1995
also contributed to the decrease in shipping expenses as a percentage of sales.
General and administrative expenses were $2,436,000 in fiscal 1995 compared
to $1,492,000 in fiscal 1994, an increase of $944,000 or 63.3%. As a percentage
of sales, these costs increased to 12.6% in fiscal 1995 from 11.1% in fiscal
1994. The increase was primarily attributable to approximately $445,000 of
general and administrative expenses incurred with respect to the Acquired
Companies, $141,000 of increased payroll costs, $70,000 of increased
professional fees and a $66,000 increase in the Company's discretionary
contribution to the employee profit sharing plan.
Selling and marketing expenses were $1,800,000 in fiscal 1995 compared to
$1,218,000 in fiscal 1994, an increase of $582,000 or 47.8%. As a percentage of
sales, these expenses increased to 9.4% in fiscal 1995 from 9.1% in fiscal 1994.
The increase in these expenses was partially due to higher sales and marketing
expenses as a percentage of sales within the Acquired Companies.
Interest expense for fiscal 1995 was $149,000 compared to $135,000 in
fiscal 1994, an increase of $14,000 or 10.4%. As a percentage of sales, these
expenses decreased to 0.8% in fiscal 1995 from 1.0% in fiscal 1994. The dollar
increase in interest expense was attributable to increased borrowings on the
line of credit required to finance the Company's growth. The decrease in
interest expense as a percentage of sales was due to the Company's ability to
fund growth with a relatively lower level of borrowing.
Provision for income taxes in fiscal 1995 was $429,000 compared to $341,000
in fiscal 1994, an increase of $88,000 or 25.8%. The effective tax rate
decreased to 37.2% in fiscal 1995 from 38.7% in fiscal 1994. The improvement in
the effective tax rate reflects an increase in allowable tax deductible items.
As a result of the above, net income in fiscal 1995 was $725,000 compared
to $539,000 in fiscal 1994, an increase of $186,000 or 34.5%. This represents a
decrease in net income as a percentage of net sales to 3.8% in fiscal 1995 from
4.0% in fiscal 1994.
19
<PAGE> 24
QUARTERLY RESULTS
The following table sets forth certain unaudited selected quarterly
financial information for fiscal 1995, fiscal 1996 and the quarter ended May 31,
1996 which, in the opinion of management, reflects all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of
such information. Results of operations for any one or more quarters are not
necessarily indicative of results for an entire year or of continuing trends.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996 FISCAL 1997
---------------------------------------- ---------------------------------------- -----------
MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30 FEB. 29, MAY 31,
1994 1994 1994 1995 1995 1995 1995 1996 1996
------- -------- -------- -------- ------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $4,013 $4,676 $5,265 $5,293 $5,681 $6,355 $6,357 $6,879 $7,702
Cost of goods sold............. 2,540 2,970 3,392 3,203 3,673 4,200 3,925 4,179 4,801
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... 1,473 1,706 1,873 2,090 2,008 2,155 2,432 2,700 2,901
------ ------ ------ ------ ------ ------ ------ ------ ------
Shipping....................... 250 346 304 588 235 433 417 661 565
General and administrative..... 442 646 690 658 734 708 826 838 767
Selling and marketing.......... 326 400 493 581 558 628 638 688 818
Foreign exchange losses, net... 58 57 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total expenses................. 1,076 1,449 1,487 1,827 1,527 1,769 1,881 2,187 2,150
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income............... 397 257 386 263 481 386 551 513 751
Interest expense............... 22 45 37 45 49 49 45 52 44
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before provision for
income taxes................. 375 212 349 218 432 337 506 461 707
Provision for income taxes..... 147 83 137 62 174 154 173 167 268
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income..................... 228 129 212 156 258 183 333 294 439
====== ====== ====== ====== ====== ====== ====== ====== ======
Net income per common share.... $ .15 $ .08 $ .14 $ .10 $ .17 $ .12 $ .22 $ .19 $ .29
====== ====== ====== ====== ====== ====== ====== ====== ======
Weighted average number of
shares outstanding........... 1,515 1,515 1,515 1,515 1,515 1,507 1,500 1,500 1,500
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
------------------------------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996 FISCAL 1997
---------------------------------------- ---------------------------------------- -----------
MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30 FEB. 29, MAY 31,
1994 1994 1994 1995 1995 1995 1995 1996 1996
------- -------- -------- -------- ------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross profit................... 36.7% 36.5% 35.6% 39.5% 35.3% 33.9% 38.3% 39.2% 37.7%
Operating income............... 9.9 5.5 7.3 5.0 8.5 6.1 8.7 7.5 9.8
Net income..................... 5.7 2.8 4.0 2.9 4.5 2.9 5.2 4.3 5.7
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced a 38.0% compound growth rate since 1992, with
its net sales increasing from $6,966,000 in fiscal 1992 to $25,272,000 in fiscal
1996. The Company has financed its cash requirements primarily through
operations and borrowings on its bank credit line. The Company also issued
shares of its Preferred Stock in order to finance the acquisitions of Marion
Tool and Andrews Tools during fiscal 1995.
The Company's bank credit facility currently permits borrowings of up to
$3,250,000 as a revolving credit against a fixed percentage of eligible accounts
receivable and inventory. The interest rate on the line is determined by
reference to certain base lending and LIBOR rates. As of May 31, 1996, the
interest rates in effect were the bank's base lending rate of 8 1/4% plus 1/2%
and the LIBOR rate of 7 1/4% plus 225 basis points. The amount borrowed under
the credit facility varies based on the Company's cash requirements. The credit
facility is collateralized by substantially all of the assets of the Company and
is partially guaranteed by the Company's majority shareholder. As of May 31,
1996, the Company had $1,688,000 of outstanding direct borrowings and $101,000
of contingent liability under open letters of credit as compared to $2,448,000
of direct borrowings and $67,000 of contingent liability under open letters of
credit as of February 29, 1996. The Company intends to use $1,400,000 of the net
proceeds of this offering to reduce the outstanding balance of direct borrowings
under the credit facility. The credit facility terminates on June 30, 1998.
20
<PAGE> 25
As of May 31, 1996, the Company's principal sources of liquidity included
cash of $316,000 and net accounts receivable of $3,061,000. The Company had
working capital of $3,401,000 and long-term debt of $75,000 as of May 31, 1996.
For the three months ended May 31, 1996, operating activities provided cash
of $570,000, primarily from net income of $439,000. Net cash used in investing
activities during the three months ended May 31, 1996 was $1,000, reflecting the
purchase of certain fixed assets, while net cash used in financing activities
during the same period was $432,000, consisting primarily of payments on the
Company's bank credit facility.
During fiscal 1996, operating activities used cash of $1,079,000 primarily
due to increases in accounts receivable and inventories of $1,223,000 and
$435,000, respectively, which were partially offset by net income of $1,068,000.
Net cash used in investing activities during fiscal 1996 was $46,000, consisting
entirely of capital expenditures. Net cash provided by financing activities
during fiscal 1996 was $1,189,000, reflecting net borrowings of $1,051,000 under
the Company's bank credit facility.
During each of the five years in the period ended February 29, 1996, the
Company's gross profit margins have remained constant in a range from
approximately 36% to approximately 37% of net sales. Although the Company is not
currently aware of material developments which would cause a short-term decrease
in gross profit margins, it is possible that factors outside the Company's
control could have a material adverse impact on future gross profit margins.
These factors include, but are not limited to, increases in the cost of raw
materials such as steel, aluminum, plastic or wood, increases in wage levels
which are not recovered through increased selling prices or enhanced
productivity, greater reliance on lower profit margin products, adverse changes
in the value of the U.S. dollar against foreign currencies, and increased
reliance on key customers as consolidation continues in the home improvement
retail market. Although the Company will seek to limit the impact of these
developments on gross profit margins through a variety of means such as
substitution of alternate raw materials where possible, shifting of production
among foreign and domestic sources, increasing selling prices, enhancing
productivity, and adjusting its product mix to achieve higher average gross
profit margins, there can be no assurance that the Company will be successful in
maintaining historic gross profit margins or that trends within the home
improvement market will not adversely impact the Company's gross profit margins.
See "Risk Factors -- Customer Concentration; Dependence on Significant
Customers," "Risk Factors -- Reliance on Suppliers and Sales Agents," and "Risk
Factors -- Risks Associated with International Operations."
Historically, the Company's business has not required significant capital
expenditures. The Company's capital expenditures were approximately $30,000,
$91,000 and $46,000 in fiscal 1994, 1995 and 1996, respectively. The Company
intends to use approximately $1,200,000 of the net proceeds from this offering
to make certain capital expenditures in connection with the expansion and
upgrading of facilities and the purchase of manufacturing equipment. The Company
intends to rely on cash generated from operations, borrowings under its credit
facility and the proceeds from this offering to finance its working capital
requirements for at least the next 12 months.
21
<PAGE> 26
BUSINESS
INTRODUCTION
Founded in 1979, the Company is a leading manufacturer, marketer and
distributor of a broad line of specialty tools and related products for the home
improvement market. Under brand names including "QEP," "O'Tool," "Marion Tool"
and "Andrews Tools," the Company markets over 4,000 specialty tools and related
products used primarily for surface preparation and installation of ceramic
tile, carpet, marble, masonry, drywall and paint. The Company's products
include, among other items, trowels, floats, tile cutters, wet saws, spacers,
nippers, pliers, carpet trimmers and cutters, knives and abrasives. The
Company's products are sold through home improvement retailers including
national and regional chains such as Home Depot, Lowe's and Hechinger/Home
Quarters, specialty distributors to the hardware, construction and home
improvement trades, retailers such as Ace Hardware and New York Carpet World,
and OEMs such as Stanley and Red Devil. The Company's full line of specialty
tools and related products are marketed for use by do-it-yourself consumers as
well as construction and remodeling professionals.
Since fiscal 1992, the Company's net sales have increased at a compound
annual rate of 38.0% to $25,272,000 in fiscal 1996. In the three months ended
May 31, 1996, the Company's net sales increased 35.6% over the prior comparable
period to $7,702,000. The growth in net sales over the last four fiscal years
reflects (i) the introduction of new products and the Company's success in
cross-marketing new and existing products among its channels of distribution,
(ii) the Company's expansion of its market share through sales to additional
home improvement retailers, distributors, OEMs and specialty retail customers,
(iii) growth experienced by the Company's customers within the home improvement
market, particularly among national and regional home improvement retailers, and
(iv) growth of the home improvement market as a whole. The Company believes it
is in a position to pursue additional growth in sales as it expands its product
lines, continues marketing to new customers and seeks to capitalize on the
ongoing consolidation of the home improvement retail market by national and
regional home improvement retailers.
The growth in the Company's net sales described above was accomplished in
part due to specific actions taken by the Company in response to perceived
market or sales opportunities. For example, the Company's sales of new products
were directly impacted by the introduction of a line of carpet tools in fiscal
1995 and the introduction of two power tools in fiscal 1996. Since its most
recent catalog was published by the Company in fiscal 1995, the Company has
introduced a total of approximately 153 new products. The Company's cross-
marketing of new and existing products was enhanced through the expansion of its
product line as well as through the acquisitions completed in fiscal 1995. In
conjunction with the acquisitions, the Company began marketing each subsidiary's
products through the Company's existing channels of distribution and identified
opportunities for each subsidiary to manufacture products formerly obtained from
outside suppliers. As the Company identified acquired products or product groups
suitable for its existing customer base, the Company commenced marketing and
sales initiatives designed to introduce these products to its own customers and
customers of its other subsidiaries. Accordingly, the completion of each
acquisition resulted in the Company acquiring new manufacturing capabilities and
a new list of customers to which existing products were then sold where
appropriate.
The Company has also sought to market its products to additional customers
throughout the home improvement industry, including new customers such as
specialty distributors and OEMs. The Company believes it was successful in
securing product orders from Stanley and Red Devil only after the Company
increased its market penetration and became a more visible market force in the
manufacturing of quality specialty tools, during which time the Company began a
marketing effort directed toward OEMs. The Company has also devoted considerable
management time and effort to the identification of trends affecting home
improvement retailers, distributors, and OEMs in order to direct its marketing
and sales initiatives to those customers who are seeking increased market share
within their chosen markets or who are expanding geographically into new
markets. In particular, the Company has marketed its specialty tools and related
products to home improvement retailers undergoing significant growth in retail
locations in their primary territories and new markets.
22
<PAGE> 27
While the growth experienced by the Company's customers and market growth
was not directly attributable to actions taken by the Company, such growth
prompted the Company to develop specific responses in an effort to capitalize on
both customer and market growth. For example, as sales to large home improvement
retailers increased, the Company developed more comprehensive customer service
programs designed to meet the special needs of this customer base. The
acquisitions completed in fiscal 1995 also enabled the Company to offer these
customers an expanded product line, faster delivery from multiple warehouse
locations and greater participation in cooperative promotions and sales events.
Growth in the home improvement market as a whole also contributed to the
Company's decisions to undertake the acquisitions in fiscal 1995, to increase
the Company's capitalization through seeking increases in the size of its bank
credit facility and to undertake this offering. The Company expects that
continued growth among its customers and the home improvement market will have a
direct affect on the rate of the Company's sales growth, its acquisition
strategy and the nature of its marketing and sales initiatives.
In fiscal 1995, the Company completed the acquisitions of O'Tool Company, a
distributor of hardware, masonry, carpentry and tiling tools, Marion Tool
Company, a manufacturer of striking tools since 1924, and the Andrews Tools
Company, a drywall and paint tool manufacturer organized in 1959. Through these
strategic acquisitions, the Company broadened its product lines, increased its
customer base of home improvement retailers, distributors and OEMs, and
integrated manufacturing and marketing activities. The Company intends to pursue
acquisitions of or joint ventures with other manufacturers and distributors
which sell products complementary to those now offered by the Company.
MARKET OVERVIEW
The Company currently competes in the specialty tool segment of the tool
industry which sells to the home improvement market. Because published industry
data available to the Company does not differentiate between tools and other
products marketed within the home improvement industry, the market information
set forth below provides data concerning the broad trends affecting the home
improvement market in general. The Company believes that the trends in the home
improvement market reflect the particular trends affecting the Company's
business within the specialty tool segment. This belief is based upon the
Company's comparison of growth rates in the home improvement market to growth
rates experienced by the Company, review of industry publications and a
comparison by management of this information to information available to the
Company from its customers and suppliers, and management's experience in the
specialty tool segment of the home improvement market.
According to industry information published by the National Home Center
News ("NHCN"), the United States home improvement market generated retail sales
of over $132 billion in 1995, including sales in both the "do-it-yourself" and
professional market segments. This is an increase of $16 billion over 1993
retail sales of $116 billion. NHCN projects that these sales will reach
approximately $189 billion by the year 2000, which would represent a compound
annual growth rate of approximately 7.5% for the five year period.
Within the home improvement market, distribution channels have continued to
consolidate as a result of the success of the warehouse home center format used
by large home improvement retailers such as Home Depot and Lowe's. The
increasing dominance of national home improvement retailers results from their
ability to offer broad product lines, project advice and orientation,
competitive pricing, aggressive promotions and large-format stores. Estimates
published by the NHCN indicate that from 1993 to 1995, the average size of home
improvement centers operated by the top ten retailers increased from 60,600
square feet to 62,700 square feet, while the average annual sales per store
increased from $14.8 million to $18.3 million. In 1995, the ten largest home
improvement retailers accounted for approximately 28.3% of the industry's total
sales, up from 23.6% in 1993. The following table sets forth selected
information concerning sales and percentage growth, number of stores and square
footage for each of the top ten home improvement retailers for 1993, 1994 and
1995, as reported by the NHCN.
23
<PAGE> 28
<TABLE>
<CAPTION>
SQUARE FOOTAGE
-------------------------
ANNUAL SALES % STORES (IN THOUSANDS)
RANK (IN MILLIONS) CHANGE (YEAR-END) AVERAGE
---------------- ------------------------- 1994- ---------------- TOTAL TOTAL PER STORE
1993 1994 1995 COMPANY 1993 1994 1995 1995 1993 1994 1995 1994 1995 1995
---- ---- ---- -------------------------- ------- ------- ------- ------ ---- ---- ---- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1 1 Home Depot................ $9,239 $12,477 $15,470 24.0 264 340 423 35,133 44,356 105
2 2 2 Lowe's Cos................ 4,538 6,111 7,075 15.8 311 336 365 18,604 23,945 66
6 6 3 Menard.................... 1,700 2,300 2,700 17.4 88 102 115 8,415 10,300 90
4 4 4 Payless Cashways.......... 2,601 2,723 2,685 (1.4) 196 201 200 6,400 6,400 32
3 3 5 Builders Square........... 2,719 2,952 2,639 (10.6) 181 166 174 15,620 16,450 95
5 5 6 Hechinger/Home Quarters... 2,095 2,454 2,256 (8.1) 128 133 118 10,842 9,340 79
7 7 7 HomeBase.................. 1,586 1,357 1,449 6.7 83 77 79 8,393 8,611 109
8 8 8 Eighty-Four Lumber........ 1,058 1,275 1,250 (2.0) 377 377 375 5,278 5,250 14
10 9 9 Wickes Lumber............. 847 987 973 (1.4) 125 132 110 1,200 1,057 10
9 10 10 Sutherland Lumber......... 850 900 920 2.2 85 85 85 2,380 2,380 28
</TABLE>
As illustrated above, the Company's two largest customers, Home Depot and
Lowe's, each experienced compound annual sales growth rates of 29% and 25%,
respectively, from 1993 to 1995. According to Home Depot's most recent annual
report, Home Depot operated 423 retail stores as of the end of its 1995 fiscal
year, as compared to 340 at the end of 1994. Home Depot's 1995 annual report
stated that it plans to have 900 stores in operation by the year 2000. Lowe's
1995 annual report stated that it had 365 stores at January 31, 1996 (its fiscal
year end) and that it is committed to having 600 stores in operation by the year
2000. NHCN has reported that Home Depot and Lowe's are expected to open 97 and
60 stores, respectively, during 1996. As consolidation continues in the home
improvement market, the Company expects that sales of the largest national and
regional home improvement retailers will continue to grow faster than the
overall market. The following table sets forth certain historical and projected
information concerning market concentration within the home improvement retail
market, including the historical and projected market share for Home Depot.
COMBINED RETAIL SALES AS % OF INDUSTRY TOTAL
<TABLE>
<CAPTION>
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00
--- --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Top 100 31 32 33 37 38 41 43 45 50 54 59 62 67
Top 10 17 18 19 22 24 26 30 32 37 41 45 50 55
Home Depot 3 3 4 6 8 9 11 13 16 19 22 25 29
</TABLE>
The vertical axis measures percentage, ranging from 0% to 70%. Rising above
the horizontal axis are 13 bars. Each bar relates to a separate year, commencing
in 1988 and ending in 2000. The chart presents historical information for the
years 1988 through 1994, and projected information for the years 1995 through
2000. The bar for each year illustrates sales by Home Depot, the ten largest
home improvement retailers, and the 100 largest home improvement retailers as a
percentage of total sales in the home improvement industry. The chart shows
consistent growth from 1988 through 2000, with sales by Home Depot projected to
reach 30% of industry sales in 2000; sales by the top ten retailers projected to
reach 55% of industry sales in 2000; and sales by the top 100 retailers
projected to reach 70% of industry sales by 2000.
Source: National Home Center News; U.S. Department of Commerce.
24
<PAGE> 29
The Company believes that growth in the home improvement market is being
driven by several factors, including (i) aging of the United States housing
stock, which requires greater repair and maintenance expenditures, (ii)
increased housing turnover of both new and existing homes, (iii) favorable
demographic trends, with "baby boomers" now reaching the 35 to 54 year old
category which historically has accounted for the largest home improvement
expenditures of any age group, and (iv) changes in consumer preferences, which
have caused an increase in the median size of new homes and which have
contributed to demand for remodeling and expansion of older homes.
The United States housing stock consists of over 100 million units, of
which approximately 70% are nearly 20 years old and nearly half are over 40
years old. Due to a decline in housing starts from the peak level of the 1970s,
the average age of U.S. homes is expected to increase. In addition to repair and
maintenance expenditures, aging homes will continue to drive spending on
remodeling and renovations. The following table sets forth information
concerning millions of homes built by decade through the 1980s.
BAR CHART ENTITLED "AGING STOCK OF AMERICAN HOMES."
The vertical axis at the left side of the chart measures millions of homes
constructed in the United States ranging from zero to 25 million. Rising above
the horizontal axis are 6 bars. The first bar represents homes constructed
before 1939. The next 5 bars represent (from left to right) the number of homes
constructed per decade, commencing with the 1940s and concluding with the 1980s.
The chart shows that approximately 18 million homes were constructed before
1940, and that the approximate number of homes constructed in the 1940s through
the 1980s, respectively, were as follows: 9 million homes; 15 million homes; 17
million homes; 23 million homes; and 20 million homes.
Source: The Census Bureau
Because a majority of home improvement expenditures is believed to occur
within the first two years of ownership, as existing homes are updated and new
homes are personalized to the tastes of their owners, housing turnover is a
critical factor in the level of home improvement activity. According to
published industry data, sales of existing homes account for 85% of total
housing turnover, with the balance generated by sales of newly constructed
homes. The following table sets forth housing turnover of new and existing homes
from 1983 to 1994.
BAR CHART ENTITLED "HOUSING TURNOVER BY TYPE."
The vertical axis at the left side of the chart measures millions of homes
sold in the United States ranging from 0 to 4 million. Rising above the
horizontal axis are 12 bars. Each bar represents the number of homes sold in the
United States in a particular year, commencing in 1983 and ending in 1994. The
chart shows that the approximate number of homes sold on an annual basis from
1983 to 1994, respectively, were as follows: 3.4 million homes; 3.5 million
homes; 3.9 million homes; 4.3 million homes; 4.1 million homes; 4.2 million
homes; 4.1 million homes; 3.7 million homes; 3.6 million homes; 4.2 million
homes; 4.5 million homes; and 4.6 million homes.
Source: U.S. Department of Commerce
25
<PAGE> 30
BUSINESS STRATEGY
The Company's strategy is to enhance its position as a leading manufacturer
of specialty tools and related products by introducing new products and
cross-selling products among its channels of distribution, expanding market
share by obtaining new customers, and capitalizing on expected growth of its
largest customers and of the home improvement market as a whole. Key elements of
the Company's strategy include:
Increase Sales By Expanding Product Lines and Adding New Customers.
The Company continuously seeks to expand its product lines by adding
specialty tools and related products which can be marketed to the Company's
existing customer base. In fiscal 1996, the Company identified a market
opportunity to introduce two power tools, which became two of the Company's
five best selling products during this period. The Company believes that
broadening its product lines will increase the Company's market penetration
and allow the Company to serve its national and regional home improvement
retail customers more effectively. The Company intends to expand its market
share by actively marketing its products to home improvement retailers,
distributors, OEMs and specialty retail accounts not currently served by
the Company.
Capitalize on Cross-Selling of Existing and New Products. A number of
the products manufactured and distributed by the Company may be used in
multiple applications and are therefore suitable for marketing to several
categories of customers. For example, floats used in the tile trades are
also frequently used in drywall and paint applications. The Company expects
to continue its practice of marketing products with multiple applications
to a variety of customers within different channels of distribution. As the
Company introduces new products or adds products through acquisitions, the
Company will evaluate these products for sale through multiple channels of
distribution. The Company believes that this strategy will permit the
Company to further leverage its product line and customer base in an
efficient and cost-effective manner.
Emphasize Customer Service. The Company has developed and implemented
a multi-faceted customer service program to address the requirements of its
retail, distributor and OEM customers. Under this customer service program
the Company maintains inventories of tools and related products in multiple
locations to permit prompt deliveries, offers a customer service hotline,
provides parts and repair service for tools, provides education classes for
store personnel and participates in cooperative promotions and special
sales events. The Company also offers certain of its customers electronic
order acceptance and billing and prepaid delivery for product shipments
with a minimum purchase. Because home improvement retailers place
considerable value on the customer service provided by their vendors, the
Company anticipates expanding its customer service program in the future in
order to respond to the needs of its customers.
Pursue Additional Strategic Acquisitions. The Company intends to
continue to pursue acquisitions of specialty tool and component
manufacturers, distributors and other companies which will complement the
Company's business, products, distribution channels and brand names. By
consolidating the manufacturing and marketing of related products now
manufactured by others, and by capitalizing on additions to its customer
base through acquisitions, the Company believes it can successfully enhance
its market presence and increase sales.
Expand Foreign Market Presence. The Company believes that
international markets provide a significant opportunity to increase sales
of its specialty tools and related products. The Company recently hired a
multilingual director of foreign sales and has also retained the services
of an independent representative skilled in foreign sales of specialty
tools. Through these and other personnel, the Company has commenced the
implementation of a foreign sales marketing program which is designed to
increase the Company's presence in foreign markets including, among others,
Canada, Central America, Mexico, Europe and South America. The Company
intends to pursue additional international sales opportunities through
marketing initiatives that will capitalize on its broad product line and
comprehensive customer service.
26
<PAGE> 31
Enhance Manufacturing Capabilities. The Company's manufacturing
objectives include controlling manufacturing costs, assuring continued high
quality of its products, and reducing product manufacturing and shipment
times. The Company continually reviews its product line with a view toward
identifying products for which in-house manufacturing is appropriate based
upon a comparison of purchase and manufacturing costs, quality assurance,
shipment times and product demand. The Company has allocated a portion of
the proceeds of this offering to the purchase of capital equipment which
will be used to increase manufacturing capacity for certain specialty tools
now purchased by the Company from outside suppliers.
PRODUCTS
The Company manufactures and distributes a broad line of over 4,000
specialty tools and related products. The Company's products are offered under
brand names including "QEP" "O'Tool," "Marion Tool" and "Andrews Tools" and are
used primarily for surface preparation and installation of ceramic tile, carpet,
marble, masonry, drywall and paint. The following table sets forth certain
information concerning the Company's principal tool groups and their markets,
distribution channels and price positioning.
<TABLE>
<CAPTION>
TOOL OR RELATED PRODUCT GROUP
--------------------------------------------------------------------------
Markets TILE CARPET STRIKING TOOLS DRYWALL AND PAINT
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Primary.............. Do-it-yourself Do-it-yourself Contractor Contractor
Secondary............ Contractor Contractor Do-it-yourself Do-it-yourself
Distribution Channels
Primary.............. Home improvement Home improvement Distributors and OEMs
retailers retailers retailers
Secondary............ Tile retailers Carpet retailers OEMs Distributors
and distributors
Product Offerings...... Full line Limited line Popular products High end
Price Positioning...... Multiple price Multiple price Middle to high Middle to high
points points
</TABLE>
The Company believes that a majority of its products are purchased by
"do-it-yourself" consumers, although certain of the Company's products are
designed and priced for sale to remodeling and construction professionals. A
number of the products manufactured by the Company such as trowels, floats,
pliers, blades and abrasives, among others, are marketed through multiple
distribution channels for use in installation of a variety of products. For
example, floats used in tile applications are also frequently used in drywall
and paint applications. Other tools such as drywall taping knives, tile cutters,
electric wet saws, nippers, sanders, scrapers, carpet trimmers and rollers are
used in single applications. The Company's products generally retail for prices
ranging from $2 to $150, although certain types of electric wet saws retail for
up to $600. A majority of the Company's revenue is generated by sales of
products priced at less than $10 retail.
Net sales of a single product accounted for approximately 7% of the
Company's net sales in fiscal 1995 and for approximately 5% of net sales in
fiscal 1996. In the three months ended May 31, 1996, one additional product
accounted for over 5% of net sales. Management anticipates that products which
account for 5% or more of the Company's net sales will vary from period to
period. See "Risk Factors -- Product Sales Concentration." As the Company seeks
to broaden its product lines, the limited shelf space available for specialty
tools and related products may adversely impact sales of existing or newly
introduced products. See "-- Competition."
The Company maintains an informal research and development program through
which it seeks to identify new product opportunities within its primary markets.
Methods by which the Company seeks to identify product opportunities include
soliciting product feedback from customers through its outside sales force and
manufacturers' representatives, review of product brochures and catalogs issued
by foreign and domestic manufacturers of specialty tools, review of product
concepts with buyers employed by its customers,
27
<PAGE> 32
and attendance at industry trade shows and conventions at which new product
concepts are introduced and discussed. The Company also considers participation
in joint ventures and evaluation of product samples to be an important part of
its effort to identify new product opportunities. Although the Company does not
maintain a formal research and development department, the Company's executive
officers and sales personnel are active in identifying opportunities for the
Company on a continuous basis.
Although the Company manufactures and distributes over 4,000 products, a
majority of the Company's customers purchase between 20 and 150 individual
stock-keeping units ("SKUs"). As the Company's product mix changes or as
customers add or delete products, the number of SKUs carried by customers will
vary. The Company's products or packaging are encoded with bar code product
identification information, which expedites checkout and pricing. A majority of
the Company's customers utilize bar code information for automatic inventory
analysis and, in certain cases, for automatic ordering of inventory from the
Company.
RELATIONSHIP WITH HOME DEPOT AND LOWE'S
In 1986, the Company began doing business with Home Depot, currently the
largest home improvement retailer in the United States, with 1995 sales of $15.5
billion. In 1993, the Company added Lowe's as a customer, which is now the
second largest home improvement retailer in the country, with 1995 sales of $7.1
billion. Home Depot and Lowe's are the Company's two largest customers,
accounting for 51.5% and 10.1% of the Company's fiscal 1996 net sales,
respectively. In the three months ended May 31, 1996, Home Depot and Lowe's
accounted for 49.9% and 11.9% of the Company's net sales, respectively.
Because of the importance of home improvement retailers to the Company, the
Company has, in cooperation with its customers, developed a multifaceted
customer service program. The Company has also tailored its customer service
programs to ensure that each customer's specific needs are given a high priority
with direct attention from senior officers of the Company. The Company's
customer service programs include:
- Providing a range of in-store services, including assistance with
inventory control, maintenance of product displays and introduction of
new products
- Maintaining inventories of tools and related products in multiple
locations to permit rapid shipping
- Delivering orders promptly
- Holding education classes for retail store personnel
- Packaging with multilingual labels
- Prepaying delivery for product shipments with minimum purchase
- Participating in cooperative promotions and special sales events
- Providing product research for buyers on a continuous basis
- Operating a customer service hotline
- Providing parts and repair service
- Assisting in tool and product sourcing
- Extending of advertising allowances and special credit terms
- Accepting orders electronically and billing through electronic data
interchange
- Bar coding for each individual SKU
- Incorporating anti-theft tags in packaging
- Using slip sheets in lieu of pallets for delivery
According to the NHCN, home improvement retailers place considerable value
on service and promotional support. The Company believes that the development of
its extensive customer service program for
28
<PAGE> 33
Home Depot, Lowe's and others has been instrumental in increasing the Company's
sales to these home improvement retailers. The Company continually evaluates its
service and promotional activities undertaken on behalf of Home Depot, Lowe's
and others in order to identify other means by which it can more effectively
serve these customers.
The Company believes that national and large regional home improvement
retailers such as Home Depot and Lowe's will continue to consolidate the home
improvement retail market in the near future. According to Home Depot's most
recent annual report, Home Depot operated 423 retail stores as of the end of its
1995 fiscal year, as compared to 340 at the end of 1994, and plans to have 900
stores in operation by the year 2000. Lowe's 1995 annual report stated that it
had 365 stores at January 31, 1996 (its fiscal year end) and that it is
committed to having 600 stores in operation by the year 2000. Further, NHCN has
reported that Home Depot and Lowe's plan to open 97 and 60 home centers,
respectively, in 1996. From 1993 to 1995, Home Depot and Lowe's experienced
compound annual sales growth rates of 29% and 25%, respectively. The Company
believes that Home Depot and Lowe's will continue to hold significant market
shares in the home improvement retail market and will continue to expand the
number of their home centers at a rapid pace. While the Company expects to
expand its customer base in the future, sales to Home Depot and Lowe's will
continue to significantly impact the Company's overall level of net sales and
profitability. See "Risk Factors -- Customer Concentration; Dependence on
Significant Customers."
MANUFACTURING AND SUPPLIERS
The Company estimates that in fiscal 1996 products it manufactured
accounted for approximately 25% of its net sales, and that finished products it
purchased from outside suppliers accounted for approximately 65% of its net
sales. Parts and components purchased and later assembled or finished by the
Company accounted for the remaining 10% of net sales. The Company utilizes a mix
of its own manufacturing of specialty tools and related products and
manufacturing services provided by outside suppliers in order to (i) reduce
overall manufacturing costs by purchasing finished products and components from
efficient and cost-effective sources, (ii) establish domestic production of
products or parts which are critical for domestic supply due to shipping costs,
frequency of deliveries or marketing concerns, (iii) maintain the traditional
high quality of the Company's specialty tools and related products, and (iv)
capitalize on the Company's production expertise in instances where production
volumes warrant in-house manufacturing.
The Company conducts its in-house manufacturing through its subsidiaries,
which include American Trowel & Float Company, O'Tool Company, Marion Tool
Company/Westpoint Foundry and Andrews Tools Company. The Company acquired O'Tool
Company, Marion Tool Company/Westpoint Foundry and Andrews Tools Company in
fiscal 1995. The following table sets forth certain information concerning the
Company as well as each of its subsidiaries.
<TABLE>
<CAPTION>
COMPANY OR YEAR DATE
SUBSIDIARY FOUNDED ACQUIRED PRODUCT LINES PRIMARY CUSTOMERS
- ------------------------------ -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Q.E.P. Co., Inc........ 1979 N/A All types of specialty National and regional
hand and power tools home improvement
retailers
American Trowel &
Float Company........ 1993 N/A Trowels, floats and Q.E.P.
misc. tools
O'Tool Company......... 1979 June Masonry, carpentry, Small retailers and
1994 tiling and misc. tools dealers
Marion Tool Company/
Westpoint Foundry.... 1924 October Striking tools Hardware chains and
1994 distributors
Andrews Tools
Company.............. 1959 January Drywall and paint tools Small retailers and
1995 O'Tool Company
</TABLE>
29
<PAGE> 34
Due to the rapid increase in the Company's sales in recent years, the
Company has periodically reviewed its product requirements and manufacturing
sources in order to identify areas in which efficiencies can be realized. As a
result of one of these reviews, the Company has budgeted a portion of the
proceeds of this offering to capital expenditures, a portion of which will
include the purchase or lease of production equipment which will enable the
Company to commence domestic manufacturing of certain products or components now
purchased from offshore suppliers. The Company intends to continue to evaluate
the efficacy of manufacturing or purchasing products or components, and intends
to continue to increase its manufacturing of products or components where volume
or shipping requirements indicate that manufacturing will lead to lower costs or
improved quality. In certain cases, the Company has commenced manufacturing of
products for which a "Made in the USA" label will enhance the Company's
marketing efforts.
The Company estimates that it purchased products and components from
approximately 75 different manufacturers in fiscal 1996, of which less than 25%
were foreign sources. The Company has not entered into written agreements with
any of its suppliers and believes that multiple sources of supply exist for
nearly all of the products purchased from outside suppliers. The Company
currently relies on two foreign suppliers as the sole sources of supply for two
power tools which are currently among the Company's five best selling products.
The Company intends to develop alternate sources of supply for these products,
although an extended interruption prior to the location of alternate suppliers
could adversely affect the Company's results of operations. See "Risk
Factors -- Reliance on Suppliers and Sales Agents."
During fiscal 1996, the Company purchased finished products and components
through two foreign sales agents which accounted for 7.9% and 16.3% of the
dollar amount of the Company's net sales. These foreign sales agents purchased
finished products and components from a number of manufacturers located in
Taiwan, China and other countries. The Company believes that these sales agents
purchased products from 10 to 12 different manufacturers in fiscal 1996.
Although the Company believes it could purchase products directly from these
manufacturers, foreign sales agents will generally warehouse finished and
unfinished products and will consolidate products to allow more cost effective
shipping. In addition, foreign sales agents will retain title to products
pending arrival at United States ports. For these reasons, the Company
anticipates continuing to utilize foreign sales agents for the foreseeable
future. While the Company believes that other sales agents could be located if
necessary, the Company intends to rely on its existing sales agents for as long
as these sales agents continue to meet the Company's foreign manufacturing and
delivery requirements.
Although the Company can generally obtain finished products and components
from domestic suppliers within 30 days of the date it places an order, foreign
orders must generally be placed at least 90 to 120 days in advance of the
intended shipment date. Shipping from foreign suppliers usually requires 30
additional days. The Company generally reviews its production requirements
weekly and updates its orders placed with foreign manufacturers approximately 30
days prior to commencement of manufacturing. Because the Company seeks to fill
customer orders promptly, the Company must anticipate customer demand for
specific products and establish its production forecasts accordingly. The
Company intends to rely on multiple suppliers for nearly all products in order
to permit the Company to meet its goal of fulfilling customer orders on a timely
basis. See "Risk Factors -- Reliance on Suppliers and Sales Agents."
The Company utilizes a management information system which is currently
being updated to permit each of its facilities to be on-line for production
scheduling, product tracking, and cost and inventory control. The management
information system now being installed will also permit customer service
personnel to have access to inventory availability. The Company has established
on-line ordering and billing systems with its largest customers which it
anticipates expanding in the future to accommodate the requirements of its
medium-sized and smaller customers.
The Company inspects and periodically tests products manufactured in-house
and by outside suppliers, and provides a limited 90-day warranty on select
products. In fiscal 1996 and the three months ended May 31, 1996, returns and
allowances totalled 3.4% and 4.6% of net sales, respectively.
30
<PAGE> 35
DISTRIBUTION, SALES AND MARKETING
Product Distribution
The Company's specialty tools and related products are currently sold
through four distinct distribution channels. Management estimates that sales
through its primary distribution channels in fiscal 1996 were as follows: 70% to
national and regional home improvement retailers, 13% to specialty distributors,
10% to chain or independent retailers in the hardware, tile, carpet and paint
markets, and 7% to OEMs, export and other specialty retailers. The following
briefly describes each of these distribution channels:
National and Regional Home Improvement Retailers. The Company's
products are primarily sold through national and regional home improvement
retailers. Home Depot, Lowe's and Hechinger/Home Quarters accounted for
51.5%, 10.1% and 5.7%, respectively, of net sales in fiscal 1996. Three
regional home improvement retailers were also among the Company's ten
largest customers in fiscal 1996. National home improvement retailers are
expected to continue their effort to consolidate the home improvement
industry by establishing additional retail locations and purchasing
regional and local competitors. Because the Company believes that national
and regional home improvement retailers are focused on marketing and
merchandising, these retailers are expected to seek strong suppliers which
are able to satisfy their requirements across many product lines. Home
improvement retailers market to both do-it-yourself consumers and
professionals in the construction and remodeling trades.
Specialty Distributors. The Company's products are sold to a variety
of specialty distributors, which in turn supply a broad range of small and
medium-size retail accounts. Although certain of the Company's specialty
distributors supply a particular segment of the market such as tile or
carpet, a number of these distributors provide full service distribution to
their retail customers. Products sold through specialty distributors are
suitable for both do-it-yourself consumers and professional remodelers or
contractors.
Chain and Independent Retail Stores. The Company's products are sold
to a significant number of small and medium-size retail accounts including
chains or independent hardware stores, tile centers, paint stores and
lumber yards. Many of these retail accounts purchase only a portion of the
Company's product line. Customers of these retailers are typically
professional contractors or semi-professional do-it-yourself consumers.
Original Equipment Manufacturers. The Company performs contract
manufacturing of certain products in its product line for OEMs such as
Stanley, Red Devil and Color Tile. The Company believes that its OEM
opportunities have expanded in recognition of its manufacturing
capabilities and due to the broadening of its product line within the last
two fiscal years. As a result, the Company has realized increased sales in
this distribution channel.
Sales
The Company's strategy is to increase sales by (i) capitalizing on growth
among its existing customer base, (ii) adding new national and regional home
improvement retailers as customers, (iii) extending its product lines through
introduction of new products, acquisitions and joint ventures, (iv)
cross-marketing existing and new products among its channels of distribution,
and (v) expanding international sales through a recently introduced foreign
sales program.
The Company employs 24 individuals in its sales and marketing department.
The Company's sales and marketing employees are responsible for implementing
marketing plans and sales programs, coordinating with independent manufacturers'
representatives which also market the Company's specialty tools and related
products, providing customer service and addressing customer inquiries, and
coordinating customer orders and shipments. The Company maintains an inside
telemarketing sales force of four individuals, an outside salaried and
commissioned sales force of six individuals and four sales managers, each of
whom is responsible for a different distribution channel. The remaining sales
and marketing personnel are employed in customer service capacities. The Company
also maintains a network of 29 independent manufacturers' representatives/firms
through which the Company's specialty tools and related products are sold on a
commission basis. The sales efforts of the manufacturers' representatives are
supported by the Company's marketing personnel.
31
<PAGE> 36
Marketing
The Company maintains an emphasis on sales and marketing which management
considers to be integral to the Company's continued growth. At least once a
calendar quarter, the Company's marketing and sales representatives, or its
manufacturers' representatives, attempt to visit a high percentage of customers'
individual retail stores. In addition, the Company provides product knowledge
classes for retail store personnel and periodically provides education classes
for in-store personnel. The Company also evaluates the product mix at its
customers' locations from time to time with a view toward changing the product
mix, if necessary, to increase sales per square foot. When the Company secures a
new customer, the Company generally resets all displays and assists store
personnel in becoming familiar with the Company's product line.
The Company has also developed a comprehensive direct mail marketing
program under which approximately 3,000 brochures are mailed monthly to
customers. These brochures highlight the Company's new product introductions,
existing products and, in some cases, are used in conjunction with trade
advertising. The Company also coordinates its telemarketing sales force with
direct mail contacts in order to maximize the success of its marketing program
as a whole. The Company has prepared extensive product catalogs, including color
catalogs covering most product lines. The Company has also developed distinctive
packaging which uses uniform colors and stylistic letters to reinforce the
Company's brand image.
The Company attends two major and numerous other industry trade shows each
year. The major industry trade shows, comprised of a tile show and a national
hardware show, are attended by national home improvement retailers,
distributors, retail chains and other customers.
The Company is also evaluating the implementation of a sales program under
which certain of the Company's customers would receive specialty tools and
related products directly from the Company's suppliers. This program, which is
designed for high volume retailers and distributors, would enable the Company to
limit its warehousing requirements even as volume shipments are increased. The
Company expects to evaluate this and other programs which are expected to result
in the Company achieving its marketing and sales objectives, while creating
additional efficiencies in operations.
COMPETITION
The home improvement industry is characterized by a number of large,
well-capitalized home improvement product manufacturers that could, should they
so choose, market products in direct competition with the Company. For example,
within the drywall tool market segment, the Company currently competes with
Marshalltown Trowel Company and Goldblatt Tools, a brand owned by Stanley.
Stanley is a significant competitor within the home improvement tool industry
and could enter additional market segments in competition with the Company,
thereby intensifying competitive pressures experienced by the Company. The
Company believes that competition in the home improvement product market is
based primarily on retail gross profit margin potential, delivery, brand
recognition, quality and availability of shelf space. The Company believes that
it competes favorably particularly with respect to retail gross profit margin
potential and delivery, and to a lesser extent with respect to brand recognition
and quality. The Company is not presently aware of any competitors which compete
on a nationwide basis with the Company in all of its primary markets. However,
the Company is subject to competition from several regional competitors, the
most significant of which are Superior Featherweight Corporation and Walton Tool
Company. The Company believes that these competitors, while significant, have
more limited revenues and a less extensive product line than the Company.
Although the Company has had limited foreign sales to date, the Company is
aware of a number of foreign competitors, many of which may have greater
financial, marketing and other resources than the Company. As the Company seeks
to penetrate more foreign markets, the Company's margins may decline due to
competitive pressures. The Company anticipates addressing its competitive
position in foreign markets by continuing to source specialty tools and related
products from low-cost manufacturing sources, increasing operating efficiencies
for Company-owned facilities and considering joint ventures or acquisitions
where appropriate.
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<PAGE> 37
The Company is aware that, from time to time, certain of its larger
customers have contacted one or more of the Company's foreign suppliers to
discuss purchasing home improvement products directly from these manufacturers.
The Company does not believe it has suffered a loss of sales to date as a result
of these discussions. Although the Company believes that its diversified product
line, brand recognition and customer service will continue to offer benefits not
otherwise available to the Company's customers from foreign manufacturers, the
Company could experience competition from one or more foreign manufacturers
which now serve as suppliers to the Company. In the event one or more of the
Company's ten largest customers begin purchasing specialty tools and related
products directly from foreign manufacturers, the Company's business would be
materially adversely impacted. Increased competition from these manufacturers or
others could result in price reductions or loss of market share, each of which
would have a material adverse effect on the Company's results of operations and
financial condition.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid, special and hazardous waste, and (ii) impose
liability for the cost of cleaning up, and certain damages resulting from, sites
of past spills, disposal or other releases of hazardous substances (together,
"Environmental Laws"). Sanctions which may be imposed for violation of
Environmental Laws include the payment or reimbursement of investigative and
remediation costs, administrative penalties and, in certain cases, prosecution
under environmental criminal statutes. The Company's manufacturing facilities
are subject to environmental regulation by, among other agencies, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and the Indiana Department of Environmental Management. The
Company believes that its manufacturing facilities are in substantial compliance
with current Environmental Laws. Compliance with Environmental Laws has not had,
and is not expected to have, a material adverse effect on the Company, including
with respect to its capital expenditures, earnings and competitive position.
In October 1994, the Company acquired all of the outstanding common stock
of Marion Tool Company, which manufactures specialty tools and related castings,
for an acquisition price of 425,547 shares of the Company's Series A Preferred
Stock. In connection with this acquisition, the Company also acquired the Marion
Tool facility and warehouse and the foundry operations known as Westpoint
Foundry, located approximately one block from those of Marion Tool Company in
Marion, Indiana. Prior to undertaking the acquisition, the Company commissioned
an independent consulting firm to prepare a series of environmental reports
covering both the Marion Tool Company and Westpoint Foundry facilities and the
associated real estate. The consultant's environmental report stated that
samples of foundry sand and slag deposited on the real estate were tested and
determined not to constitute hazardous waste. Based on the testing, the
consultants indicated that such deposits do not appear to have affected ground
water resources. Two of the samples of foundry sand with the highest
concentrations of metals were tested and it was determined that the metals
detected were not readily leachable. In addition, the consultant noted the
presence of above ground storage tanks from which some petroleum contamination
was evident. The above ground storage tanks were removed at the time of the
acquisition and the Company caused contaminated soil to be removed in accordance
with applicable Environmental Laws. Because of the proximity of soil
contamination to several structures and improvements at the site and the risk
that removal could undermine the structures, all contaminated soil was not
removed. A report of the excavation results was submitted to the Indiana
Department of Environmental Management and, based upon its discussions with such
department, the Company believes that no further action will be required
concerning the remaining contamination. However, there is no assurance that
further action with respect to the remaining contamination will not be required.
See "Risk Factors -- Environmental Matters."
The environmental reports prepared by the consultant also noted that Marion
Tool Company was identified as a potentially responsible party ("PRP") pursuant
to the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA") for the cleanup of contamination resulting from past
disposal of hazardous wastes at a certain site to which Marion Tool Company,
among others, sent wastes in the past. CERCLA requires PRPs to pay for cleanup
of sites from
33
<PAGE> 38
which there has been a release or threatened release of hazardous substances.
Courts have interrupted CERCLA to impose strict, joint and several liability
upon all persons liable for cleanup costs. As a practical matter, however, at
sites where there are multiple PRPs, the costs of cleanup typically are
allocated among the parties according to a volumetric or other standard. Based
upon, among other things, a review of the data available to the Company
regarding the site at which Marion Tool Company is alleged to have deposited a
portion of the waste located thereon, and a comparison of the potential
liability at this site to settlements reached by other parties in similar cases,
the Company believes that Marion Tool Company's liability for this matter will
not be material. Although the Company does not believe that Marion Tool Company
has other potential off-site liability, if other disposal sites where Marion
Tool Company sent waste are determined to require cleanup under CERCLA or other
similar laws, Marion Tool Company could face similar claims in the future. The
Company has not received notice of any claims relating to disposal of waste by
Marion Tool Company at any other sites.
Pursuant to the terms of an escrow agreement by and among the Company and
the sellers of the Marion Tool Company, the sellers agreed to deposit
certificates representing the 425,547 shares of Series A Preferred Stock in an
escrow account at the date of closing. The escrow agent is authorized to release
the shares of Preferred Stock to the Company within 15 days after receipt of a
written statement, in form and substance satisfactory to the escrow agent in its
discretion, providing that there has been a material breach of the
representations and warranties of the sellers contained in the stock purchase
agreement. In the event of a dispute as to the existence of a breach of a
representation or warranty, the escrow agent is authorized to retain the
certificates representing the shares of a Preferred Stock pending resolution of
a dispute among the parties, or may interplead the certificates into the
registry of a court of competent jurisdiction. Upon the expiration of six years
from the closing date and in the absence of a notice of breach of
representations and warranties by the sellers, the escrow agent is authorized to
deliver the certificates representing the shares of Preferred Stock to the
sellers. The stock purchase agreement between the Company and the sellers of
Marion Tool Company provided that Marion Tool Company had not committed any
violation of any environmental laws or regulations, and further represented that
there was no situation requiring remedial action by Marion Tool Company under
any environmental laws or regulations. The stock purchase agreement also
contained a joint and several indemnification by Marion Tool Company and each of
its shareholders in favor of the Company.
To date, the Company has not notified the escrow agent of a violation of
any environmental laws or regulations, or any situation requiring remedial
action by the Company, or any other violation of a representation or warranty,
pursuant to which the Company claims the right to the return of any of the
Series A Preferred Stock. After taking into account 106,389 shares of Series A
Preferred Stock which will convert into shares of Common Stock on the date of
this Prospectus, there are issued and outstanding 319,158 shares of Series A
Preferred Stock, par value $1.00 per share, which will be held in escrow through
August 2000 and which are subject to return to the Company in accordance with
the terms of the escrow agreement. Although the Company believes that any
environmental liabilities incurred as a result of the previous activities of
Marion Tool Company will be materially less than such amount, there can be no
assurance that the value of the outstanding Series A Preferred Stock will be
sufficient to address all environmental liabilities incurred as a result of the
prior activities of Marion Tool Company. See "Risk Factors -- Environmental
Matters."
INTELLECTUAL PROPERTY
The Company markets its specialty tools and related products under the QEP
trademark. The Company has applied for registration of the QEP trademark, as
well as the O'Tool trademark and a stylistic logo, on the Principal Register of
the United States Patent and Trademark Office. Management believes that the
Company and its subsidiaries have developed proprietary rights in the O'Tool,
Marion Tool and Andrews Tools trade names and associated common law trademarks.
The Company has not yet adopted a formal intellectual property protection
program, but intends to pursue registration of its trademarks and service marks
as advised by counsel. The Company has devoted substantial time, effort and
expense to the development of name recognition and goodwill for products under
the QEP, O'Tool, Marion Tool and Andrews Tools names. The Company intends to
maintain the integrity of its trade names and trademarks and other proprietary
names and marks against unauthorized use and to protect against infringement and
unfair competition where circumstances warrant. The Company is not aware of any
currently infringing uses.
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<PAGE> 39
EMPLOYEES
At May 31, 1996, the Company had 147 full-time employees, including 25
administrative employees, 24 sales and marketing employees, 67 manufacturing
employees and 31 employees engaged in packaging and shipping. Marion Tool
Company's ten manufacturing employees are represented by the Metal Polishers,
Buffers, Platers and Allied Workers International Union. The collective
bargaining agreement which covers these employees expires, unless renewed, in
October 1997. The Company has not experienced any work stoppages since acquiring
Marion Tool Company. The Company considers its relations with its employees to
be good.
FACILITIES
The Company currently leases five facilities located in Florida,
California, Nevada and New Jersey which consist of an aggregate of approximately
75,000 square feet. In addition, the Company owns a 40,000 square foot
manufacturing facility in Marion, Indiana, which was purchased at the time of
the acquisition of Marion Tool Company. The following table sets forth certain
information concerning facilities leased and owned by the Company as of May 31,
1996.
<TABLE>
<CAPTION>
SQUARE ANNUALIZED RENEWAL
LOCATION USE FEET COST LEASE EXPIRATION OPTION
- ------------------ ------------------------------- ------ ---------- ---------------- --------
<S> <C> <C> <C> <C> <C>
Boca Raton, FL Executive offices; warehouse... 25,675 $212,310 11/30/97 --
Mahwah, NJ Administrative offices......... 2,400 29,001 11/30/97 --
Marion, IN Manufacturing; warehouse;
assembly..................... 40,000 N/A Company owned --
Carson, CA Administrative, sales;
marketing; warehouse......... 29,200 145,448 08/14/96(1) 5 yrs.
Pompano Beach, FL Manufacturing.................. 10,000 39,204 09/30/96 3 yrs.
Carson City, NV Manufacturing; administrative;
sales; marketing;
warehouse.................... 8,000 30,000 10/31/96 --
</TABLE>
- ---------------
(1) Currently being renegotiated.
On expiration of the lease of the Company's facility in Carson City,
Nevada, the Company intends to consolidate these manufacturing and warehousing
operations into its new facility to be located in Boca Raton, Florida.
In July 1996, the Company executed a nonbinding proposal to lease an office
and warehouse facility located in Boca Raton, Florida. The proposal provides
that the Company intends to lease the facility, which consists of approximately
77,000 square feet, for a term of seven years, with a renewal option for two
five-year periods. The proposal provides for an annual base rent of
approximately $254,000 during the first 16 months of the proposed lease term,
subject to increase to an annualized base rent of approximately $328,000 in the
event the Company elects to sublease a 23,000 square foot space within the
premises. After the initial 16-month period, the proposal calls for the annual
base rent to increase to approximately $341,000 and thereafter to increase in
increments to an annual base rent of approximately $415,000 in the seventh year.
The proposal requires the Company to pay operating expenses including taxes,
maintenance and insurance for the building and anticipates that the Company will
take occupancy of the premises on or about September 15, 1996. The proposal also
calls for the Company to receive a rental allowance of $10,000 per month for the
first four months of the lease. The Company is currently engaged in negotiating
the terms of a lease with the building owner which will incorporate the terms
set forth in the nonbinding lease proposal, although there can be no assurance
that a lease will be executed between the parties. Should the Company be unable
to reach a definitive lease agreement with the building owner, the Company
anticipates identifying suitable alternate locations in or around Boca Raton,
Florida to be used for its executive offices, manufacturing and warehousing
requirements. Subject to the lease of a facility in Boca Raton, Florida, the
Company believes its facilities will be adequate to serve its requirements for
the foreseeable future.
LEGAL PROCEEDINGS
The Company is not presently involved in any legal proceedings. The Company
is the subject of claims made from time to time that its tools or related
products caused personal injury or property damage. The Company routinely refers
these claims to its insurance carrier.
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<PAGE> 40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- -------------------------------------------
<S> <C> <C>
Lewis Gould........................... 53 President, Chief Executive Officer and
Director
Susan J. Gould........................ 51 Vice President -- Administration and
Director
Patrick L. Daggett.................... 48 Chief Financial Officer and Director
Marjorie K. Rosenberg................. 52 Vice President -- Purchasing
Sydney A. Levy........................ 59 Vice President -- Operations
Robert C. Doda, Jr.................... 31 Vice President -- Manufacturing
Lee R. Collins........................ 56 Vice President -- Distribution Sales
Steven D. Schohan..................... 28 Vice President -- Western Operations
Leonard J. Gould...................... 27 Vice President -- Sales
Edward F. Ronan, Jr.(1)(2)............ 44 Director
Mervyn D. Fogel(1)(2)................. 54 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Officers are appointed by and serve at the discretion of the Board of
Directors. Each director holds office until the next annual meeting of
shareholders or until a successor has been duly elected and qualified. All of
the Company's officers devote their full-time to the Company's business and
affairs. Leonard J. Gould is the son of Lewis Gould and Susan J. Gould, who were
formerly husband and wife.
Lewis Gould co-founded the Company and has served as a director and as
President and Chief Executive Officer since its inception in 1979. Mr. Gould
oversees the Company's marketing and sales activities as well as its overall
operations.
Susan J. Gould co-founded the Company and has served as a director and as
Vice President -- Administration since its inception in 1979. Ms. Gould is
responsible for billing, collection, customer service and related functions.
Patrick L. Daggett has served as a director and as Chief Financial Officer
since 1992. From 1985 to 1992, Mr. Daggett served as controller of the Company.
Prior to joining the Company, Mr. Daggett held various accounting positions with
publishing companies based in New York.
Marjorie K. Rosenberg has served as Vice President -- Purchasing since 1990
and has been responsible for all domestic and international purchasing since
1988. Prior to joining the Company, Ms. Rosenberg was employed by Barr
Laboratories, a pharmaceuticals company, in various sales and administrative
positions.
Sydney A. Levy has served as Vice President -- Operations since July 1992.
His responsibilities include supervision of all warehouse facilities and
distribution functions. From 1983 to June 1992, Mr. Levy served as vice
president of operations at H. Cotler Co., a New York City garment manufacturer.
Robert C. Doda, Jr. has served as Vice President -- Manufacturing since
January 1992. Mr. Doda has been employed by the Company or its subsidiaries
since 1983 in various production management positions. Mr. Doda is currently
responsible for manufacturing activities at the Company's three manufacturing
facilities.
Lee R. Collins has served as Vice President -- Distribution Sales since
joining the Company in March 1993. Mr. Collins has over 30 years experience in
the home improvement industry. From Febru-
36
<PAGE> 41
ary 1992 through February 1993, he was employed as the sales manager for
Standard Tile Corporation, a ceramic tile distributor based in New Jersey. From
1973 through January 1993, he served as a master distributor for Miracle
Adhesives Corporation, a manufacturer of home improvement products. Mr. Collins
was employed by Miracle Adhesives Corporation from 1964 to 1973 in various sales
and marketing positions, including Vice President of Sales and Marketing.
Steven D. Schohan has served as Vice President -- Western Operations since
September 1995, and is responsible for the Company's west coast operations. From
January 1992 through August 1995, he was employed as the Company's west coast
sales manager. From January 1989 through December 1991, he was employed as a
buyer for Standard Brands Paint Company in Torrance, California.
Leonard J. Gould has been a full-time employee since December 1993 and has
served as a Vice President since March 1995. Mr. Gould currently serves as Vice
President -- Sales and is responsible for certain of the Company's sales and
marketing activities. From 1993 to 1994, Mr. Gould served as an assistant to the
Vice President -- Purchasing and from 1994 to March 1995 he served as a sales
manager. From May 1991 through November 1993, he was employed as a publicist for
St. Martins Press.
Edward F. Ronan, Jr. has served as a director of the Company from 1993 to
1995 and since April 1996. Mr. Ronan is a Certified Public Accountant and has
practiced with the accounting firm of Actis-Grande, Ronan & Company, LLC since
February 1984. Mr. Ronan's accounting firm provided various accounting services
to the Company during fiscal years 1988 through 1993.
Mervyn D. Fogel has served as a director of the Company since June 1996.
Mr. Fogel has over 30 years experience in the home improvement industry. Since
1986, he has served as an executive officer of certain home improvement
subsidiaries and operating divisions of Pentland, TLC, a publicly-held British
corporation. Since 1992 Mr. Fogel has served as Vice President of Business
Development for Pentland, USA, a division of Pentland, TLC. From February 1986
through November 1995, Mr. Fogel served as Chairman of Tilepak, a
California-based division of Pentland, TLC engaged in the distribution of tile
products.
BOARD COMMITTEES
The Board of Directors maintains a Compensation Committee and an Audit
Committee. The Compensation Committee is composed of Messrs. Ronan and Fogel,
the Company's non-management directors. The primary function of the Compensation
Committee is to review and make recommendations to the Board with respect to the
compensation, including bonuses, of the Company's officers and to administer the
Company's stock option plan. The Audit Committee is comprised of Messrs. Ronan
and Fogel. The function of the Audit Committee is to review and approve the
scope of audit procedures employed by the Company's independent auditors, to
review and approve the audit reports rendered by the Company's independent
auditors and to approve the audit fee charged by the independent auditors. The
Audit Committee reports to the Board of Directors with respect to such matters
and recommends the selection of independent auditors.
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<PAGE> 42
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company in the
three fiscal years in the period ended February 29, 1996 of Lewis Gould, Susan
J. Gould and Patrick L. Daggett, the only executive officers of the Company
whose total annual salary and bonus exceeded $100,000 during the year ended
February 29, 1996 (the "Named Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- ---------------------------------- ------ -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Lewis Gould....................... 1996 $231,562 $20,400 $18,086 $27,228
President and Chief 1995 183,292 14,600 18,483 27,293
Executive Officer 1994 156,206 15,200 10,732 11,325
Susan J. Gould.................... 1996 $ 91,805 $34,000 $10,635 $15,490
Vice President and 1995 85,586 13,600 8,534 12,515
Secretary 1994 78,219 11,070 5,501 5,181
Patrick L. Daggett................ 1996 $107,576 $23,500 $ 9,424 $16,393
Chief Financial 1995 96,894 12,150 9,707 16,448
Officer 1994 86,088 5,600 7,512 4,909
</TABLE>
- ---------------
(1) Represents deferred compensation and, in the case of Mr. Gould, an
automobile allowance in the amount of $7,848, $7,848 and $1,308 in 1996,
1995 and 1994, respectively.
(2) Represents contributions made by the Company under its 401(k) and profit
sharing plans.
Option Grants. Effective June 30, 1996, the Company granted incentive stock
options to purchase a total of 156,150 shares of Common Stock to certain
employees of the Company, including the Named Officers. Mr. Gould and Ms. Gould
each received options to purchase 15,000 shares of Common Stock at an exercise
price of $9.35 per share, and Mr. Daggett received options to purchase 50,000
shares of Common Stock at an exercise price of $8.50 per share. Certain vesting
requirements apply to Mr. Daggett's options to purchase 30,000 shares of Common
Stock. The remainder of Mr. Daggett's options, as well as the options granted to
all other persons, are exercisable commencing January 1, 1997. The remaining
options were granted to certain employees of the Company and others at an
exercise price of $8.50 per share.
No employee of the Company receives any additional compensation for his or
her services as a director. Non-management directors receive no salary for their
services as such, but receive a fee of $500 per meeting attended. The Board of
Directors has also authorized payment of reasonable travel or other
out-of-pocket expenses incurred by non-management directors in attending
meetings of the Board of Directors.
Employment Agreement. Effective June 1996, the Company entered into an
employment agreement with Lewis Gould. The agreement provides that he shall
devote his full business time to the Company, may be terminated by the Company
for "cause" (as defined in the agreement) and that he will receive an annual
base salary of $275,000, subject to adjustment for cost of living increases. The
agreement provides that Mr. Gould may receive an annual bonus at the discretion
of the Board of Directors and will receive lump sum compensation equal to 2.9
times his annual salary and bonus in the event of a non-negotiated change in
control of the Company. The Company also provides Mr. Gould with an automobile
allowance. The employment agreement extends for a three-year term and is subject
to successive one-year renewals thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee during the fiscal year
ended February 29, 1996 and, therefore, no compensation committee interlocks
existed in such fiscal year. Lewis Gould and Susan J. Gould each participated in
deliberations concerning executive compensation paid during such year. Effective
June 1996, the Board of Directors established a Compensation Committee, a
majority of the members of which will be independent directors. The initial
members of the Compensation Committee are Edward F. Ronan, Jr. and Mervyn D.
Fogel. No executive officer of the Company serves as a member of the board of
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<PAGE> 43
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors.
STOCK OPTION PLAN
The Company adopted a stock option plan effective June 20, 1996 (the
"Option Plan"). An aggregate of 250,000 shares of Common Stock are currently
reserved for issuance under the Option Plan.
The Option Plan provides for the granting of incentive stock options
("Incentive Stock Options") within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code") and non-qualified stock options.
Non-qualified stock options may be granted to employees, directors and
consultants of the Company, while Incentive Stock Options may be granted only to
employees. The Option Plan is currently administered by the Compensation
Committee of the Board of Directors, which determines the terms and conditions
of the options granted under the Option Plan, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The exercise price of all Incentive Stock Options granted under the Option
Plan must be at least equal to the fair market value of the Common Stock of the
Company on the date of grant, and must be 110% of fair market value when granted
to a 10% or more shareholder. The exercise price of all non-qualified stock
options granted under the Option Plan shall be not less than 85% of the fair
market value of the Common Stock. The term of all options granted under the
Option Plan may not exceed ten years, except the term of incentive options
granted to a 10% or more shareholder may not exceed five years. The Option Plan
may be amended or terminated by the Board of Directors, but no such action may
impair the rights of a participant under a previously granted option.
The Option Plan provides the Board of Directors or the Compensation
Committee with the discretion to determine when options granted thereunder shall
become exercisable and the vesting period of such options. Upon termination of a
participant's employment or consulting relationship with the Company, all
unvested options terminate and are no longer exercisable, except as otherwise
determined by the Compensation Committee. Vested options remain exercisable for
a period of 30 days to one year following resignation or termination, except in
the case of termination for cause, in which event the options are not
exercisable following termination.
The Option Plan provides that, in the event the Company enters into an
agreement providing for the merger of the Company into another corporation or
the sale of substantially all of the Company's assets, any outstanding unvested
options shall become immediately exercisable as of the date of such agreement.
Upon the consummation of the merger or sale of assets such options shall
terminate unless they are assumed or another option is substituted therefor by
the successor corporation.
As of June 30, 1996, a total of 156,150 options were outstanding with
exercise prices ranging from $8.50 to $9.35 per share and a weighted average
exercise price per share of $8.67.
401(K) PLAN
Effective March 1, 1995, the Company merged, amended and restated its prior
defined contribution profit sharing plan and its prior 401(k) plan into a
revised plan (the "401(k) Plan") to provide retirement income to employees of
the Company. The prior plans were, and the 401(k) Plan is intended to remain,
qualified under Section 401(a) of the Code. The 401(k) Plan covers all employees
who are at least age 21 and have completed one year of service. It is funded
each year by the following contributions: (i) voluntary pre-tax ("salary
reduction") contributions from employees up to a maximum dollar limit set by law
(and increased for cost of living changes), (ii) discretionary matching
contributions by the Company equal to a percentage of the amount of the
employee's salary reduction contribution, which percentage is to be determined
each year by the Company (and may be zero), and (iii) a profit sharing
contribution, the amount of which, if any, is determined by the Company in its
sole discretion. Upon leaving the Company, each participant is 100% vested with
respect to the participant's contributions and is vested based on years of
service with respect to the Company's matching contributions. Contributions are
invested as directed by the participant in investment funds available under the
401(k) Plan. Full retirement benefits are payable to each participant in a
single cash payment or property upon the participant's retirement, termination
of employment, death or disability.
39
<PAGE> 44
CERTAIN TRANSACTIONS
The Company entered into a Revolving Loan and Security Agreement in 1988
(the "Loan Agreement") with Connecticut National Bank, as predecessor in
interest to Shawmut Bank Connecticut, N.A. (the "Lender"). At the time of
execution of the Loan Agreement, the Company had the right to borrow up to $2
million. The Company's President and majority shareholder, Lewis Gould,
unconditionally guaranteed all of the Company's obligations under the Loan
Agreement. Effective as of October 13, 1995, the Loan Agreement was modified in
order to (i) permit borrowings of up to $3.25 million and (ii) reduce Mr.
Gould's maximum obligation under his guaranty to $500,000. Mr. Gould receives no
compensation for such guaranty. A portion of the net proceeds from this offering
will be used to repay the entire outstanding balance under the Loan Agreement.
Such payment will benefit Mr. Gould indirectly inasmuch as he has guaranteed a
portion of the Company's obligations under the Loan Agreement.
The Company entered into a lease agreement dated March 1, 1989 covering the
Company's executive office and warehouse facility located in Boca Raton,
Florida. The Company's obligations under the lease are personally guaranteed by
Lewis Gould. Mr. Gould receives no compensation for such guaranty. See
"Business -- Facilities."
The Company formerly leased certain of its facilities from Lewis Gould and
Susan J. Gould. The Company leased a warehouse facility located in Stony Point,
New York from Mr. Gould in 1995 and 1994, rent expense for which was
approximately $86,000 and $83,000, respectively. The Company also leased a
condominium located in Boca Raton, Florida from Ms. Gould in 1995 and 1994, rent
expense for which was approximately $7,000 and $18,000, respectively. All of the
Company's facilities are currently leased from unrelated third parties.
The Company believes the terms of such transactions were on terms no less
favorable than could be obtained from unaffiliated third parties. The Company
has adopted a policy that future transactions between the Company and its
officers, directors and 5% or more shareholders are subject to approval by a
majority of the disinterested directors of the Company. Any such transactions
will be on terms believed to be no less favorable than could be obtained from
unaffiliated parties.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of: (i) a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law; (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law; and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company intends
to enter into separate indemnification agreements with its directors and
officers which will be consistent with the indemnification provisions contained
in the Delaware General Corporation Law. The indemnification agreements may
require the Company, among other things, to indemnify such officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission (the "Commission"), such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
40
<PAGE> 45
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 31, 1996 and as adjusted to
reflect the sale of Common Stock offered by this Prospectus, by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock, (ii) each of the Company's executive officers and
directors, (iii) each of the Selling Shareholders, and (iv) all executive
officers and directors as a group. Except as noted, each person or entity has
sole voting and sole investment power with respect to the shares shown. The
address of each person listed is 990 South Rogers Circle, Boca Raton, Florida
33487, except as otherwise indicated.
<TABLE>
<CAPTION>
SHARES SHARES TO BE
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING NUMBER OF AFTER THE OFFERING
-------------------- SHARES TO BE SOLD --------------------
NAME NUMBER PERCENT IN THE OFFERING NUMBER PERCENT
-------------------------------- --------- ------- ----------------- --------- -------
<S> <C> <C> <C> <C> <C>
Lewis Gould(1).................. 1,498,000 99.6% 100,000 1,298,000 51.8%
Susan J. Gould(2)............... 514,152 34.2 100,000 414,152 16.5
Patrick L. Daggett.............. -- -- -- -- --
Marjorie K. Rosenberg........... -- -- -- -- --
Sydney A. Levy.................. -- -- -- -- --
Leonard J. Gould................ 1,000 * -- 1,000 *
Robert C. Doda, Jr..............
Lee R. Collins..................
Steven D. Schohan...............
Edward F. Ronan, Jr............. -- -- -- -- --
30 Main Street, Suite 500
Danbury, Connecticut 06810
Mervyn D. Fogel................. -- -- -- -- --
7 Oak Lodge
Marloes Road
London, W82SUL England
All directors and officers as a
group (11 persons)............ 1,499,000 99.6 200,000 1,299,000 51.9
</TABLE>
- ---------------
* Less than 1%.
(1) Includes the 514,152 shares of Common Stock owned by Susan J. Gould. Mr.
Gould has the right to vote such shares until August 2006 pursuant to the
terms of a voting trust agreement.
(2) Lewis Gould has the right to vote all such shares until August 2006 pursuant
to the terms of a voting trust agreement and has a right of first refusal
to acquire any shares of Common Stock subject to the voting trust at a
price equal to the then prevailing market price of the Common Stock.
Excludes 2,000 shares of Common Stock gifted by Lewis Gould and Susan J.
Gould to two adult children as to which Lewis Gould and Susan J. Gould
disclaim beneficial ownership.
41
<PAGE> 46
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 31, 1996 and as adjusted to
reflect the sale of Common Stock offered by this Prospectus, by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock, (ii) each of the Company's executive officers and
directors, and (iii) all executive officers and directors as a group. Except as
noted, each person or entity has sole voting and sole investment power with
respect to the shares shown. The address of each person listed is 990 South
Rogers Circle, Boca Raton, Florida 33487, except as otherwise indicated.
<TABLE>
<CAPTION>
SHARES SHARES TO BE
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER THE OFFERING
-------------------- --------------------
NAME NUMBER PERCENT NUMBER PERCENT
---------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Lewis Gould(1)................................ 1,498,000 99.6% 1,298,000 51.8%
Susan J. Gould(2)............................. 514,152 34.2 414,152 16.5
Patrick L. Daggett............................ -- -- -- --
Marjorie K. Rosenberg......................... -- -- -- --
Sydney A. Levy................................ -- -- -- --
Leonard J. Gould.............................. 1,000 * 1,000 *
Robert C. Doda, Jr............................
Lee R. Collins................................
Steven D. Schohan.............................
Edward F. Ronan, Jr........................... -- -- -- --
30 Main Street, Suite 500
Danbury, Connecticut 06810
Mervyn D. Fogel............................... -- -- -- --
7 Oak Lodge
Marloes Road
London, W82SUL England
All directors and officers as a group (11
persons).................................... 1,499,000 99.6 1,299,000 51.9
</TABLE>
- ---------------
* Less than 1%.
(1) Includes the 514,152 shares of Common Stock owned by Susan J. Gould. Mr.
Gould has the right to vote such shares until August 2006 pursuant to the
terms of a voting trust agreement.
(2) Lewis Gould has the right to vote all such shares until August 2006
pursuant to the terms of a voting trust agreement and has a right of first
refusal to acquire any shares of Common Stock subject to the voting trust
at a price equal to the then prevailing market price of the Common Stock.
Excludes 2,000 shares of Common Stock gifted by Lewis Gould and Susan J.
Gould to two adult children as to which Lewis Gould and Susan J. Gould
disclaim beneficial ownership.
41.1
<PAGE> 47
SELLING SHAREHOLDERS
The Selling Shareholders may offer the 4,597 shares of Common Stock owned
by them for sale as principals for their own accounts at any time, and from time
to time, in the over-the-counter market at prices prevailing at the time of
sale, commencing nine months from the date of this Prospectus, or earlier with
the Representative's consent. The Selling Shareholders may also offer the Common
Stock in private sales at prices to be negotiated. The Company will not receive
any proceeds from the sale of shares by the Selling Shareholders.
Except for their ownership of Common Stock of the Company, the Selling
Shareholders have no material relationship with the Company. The following table
sets forth certain information regarding the Selling Shareholders. Assuming all
of the shares registered hereunder are sold, the Selling Shareholders will not
own any shares of Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK TO BE
SELLING SHAREHOLDER OWNED OFFERED
- ----------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Russell White.................................................... 2,659 2,659
Kanzawa Precision Tools Manufacturing Co., Ltd................... 1,250 1,250
Beacon Hill Tools Co............................................. 250 250
John Andrews..................................................... 197 197
James Andrews.................................................... 66 66
Nancy Andrews.................................................... 66 66
Robert Andrews................................................... 66 66
Mary Porras...................................................... 43 43
</TABLE>
PLAN OF DISTRIBUTION
The shares of Common Stock will be offered by the Selling Shareholders from
time to time in the over-the-counter market, in privately negotiated sales or on
other markets. Any securities sold in brokerage transactions will involve
customary brokers' commissions.
41.2
<PAGE> 48
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, par value $0.001 per share, and 2,500,000 shares of Preferred
Stock, par value $1.00 per share.
COMMON STOCK
At the date hereof, the outstanding Common Stock is held by four
shareholders of record. Upon consummation of this offering, 2,504,597 shares of
Common Stock will be issued and outstanding (assuming no options are exercised
and assuming the Underwriters' over-allotment option is not exercised).
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. The Company's
Certificate of Incorporation denies cumulative voting rights in the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in the assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, conversion or redemption rights. All
of the outstanding shares of Common Stock are, and the shares to be sold in this
offering when issued and paid for will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority, without further shareholder
approval, to issue up to 2,500,000 shares of Preferred Stock from time to time
in one or more series, to establish the number of shares to be included in each
such series, and to fix the designation, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuances could have the effect of decreasing the market
price of the Common Stock.
Prior to the date hereof, the Company designated 500,000 shares as Series A
Preferred Stock, 1,000,000 shares as Series B Preferred Stock and 1,000,000
shares as Series C Preferred Stock. As of the date of this Prospectus, and as
adjusted to reflect the exchange of certain shares of Preferred Stock for shares
of Common Stock, there were 319,158 shares of Series A Preferred Stock, no
shares of Series B Preferred Stock and no shares of Series C Preferred Stock
issued and outstanding. The Company currently has no plans to issue any
additional shares of Preferred Stock.
Holders of the Series A Preferred Stock are entitled to receive out of
legally available funds a cumulative dividend at the rate of $0.035 per share
per annum. Commencing on October 1, 2000, the dividend rate shall equal $1.00
multiplied by the prime interest rate published by the Wall Street Journal as of
the first day of the month in which the dividends are payable, less 1 1/4%.
Dividends must be paid on the Series A Preferred Stock before any dividend may
be declared or paid on the Common Stock. The Company is permitted to redeem the
Series A Preferred Stock during the first year following its issuance at a price
per share of $1.07 plus the amount of any accrued but unpaid dividends. The
redemption price is reduced by 1% each year thereafter to a minimum redemption
price of $1.00 per share. In the event of any liquidation or dissolution of the
Company, holders of the Series A Preferred Stock shall be entitled to receive
$1.00 per share plus any declared but unpaid dividends before any payment or
distribution may be made to the holders of Common Stock. Holders of the Series A
Preferred Stock have no voting rights.
The Series B Preferred Stock entitles the holders thereof to receive out of
legally available funds a noncumulative dividend at the rate of $0.05 per share
per annum. Dividends must be paid on the Series B Preferred Stock before any
dividend may be declared or paid on the Common Stock. The Company may
42
<PAGE> 49
redeem the Series B Preferred Stock at a price per share of $1.00. In the event
of any liquidation or dissolution of the Company, holders of the Series B
Preferred Stock shall be entitled to receive $1.00 per share plus any declared
but unpaid dividends before any payment or distribution may be made to the
holders of Common Stock. Holders of the Series B Preferred Stock have no voting
rights.
The Series C Preferred Stock entitles the holders thereof to receive out of
legally available funds cumulative dividends at the rate of $0.035 per share per
annum. The Company may redeem the Series C Preferred Stock during the first year
following its issuance at a price per share of $1.00. In the event of any
liquidation or dissolution of the Company, holders of the Series C Preferred
Stock shall be entitled to receive $1.00 per share plus any declared but unpaid
dividends before any payment or distribution may be made to the holders of
Common Stock. Holders of the Series C Preferred Stock have no voting rights.
DELAWARE BUSINESS COMBINATION PROVISIONS
As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which regulates large
accumulations of shares, including those made by tender offers. Section 203 may
have the effect of significantly delaying a purchaser's ability to acquire the
entire interest in the Company if such acquisition is not approved by the
Company's Board of Directors. In general, Section 203 prevents an "Interested
Stockholder" (defined generally as a person with 15% or more of a corporation's
outstanding voting stock) from engaging in a "Business Combination" (defined
below) with a Delaware corporation for three years following the date such
person became an Interested Stockholder. For purposes of Section 203, the term
"Business Combination" is defined broadly to include mergers and certain other
transactions with or caused by the Interested Stockholder; sales or other
dispositions to the Interested Stockholder (except proportionately with the
corporation's other stockholders) of assets of the corporation or a subsidiary
equal to 10% or more of the aggregate market value of the corporation's
consolidated assets or its outstanding stock; the issuance or transfer by the
corporation or a subsidiary of stock of the corporation or such subsidiary to
the Interested Stockholder (except for transfers in a conversion or exchange or
a pro-rata distribution or certain other transactions, none of which increase
the Interested Stockholder's proportionate ownership of any class or series of
the corporation's or such subsidiary's stock); or receipt by the Interested
Stockholder (except proportionately as a stockholder), directly or indirectly,
of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation or a subsidiary.
The three-year moratorium imposed on Business Combinations by Section 203
does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Board approves either the Business Combination or
the transaction which resulted in the person becoming an Interested Stockholder;
(b) the Interested Stockholder owns 85% of the corporation's voting stock upon
consummation of the transaction which made him or her an Interested Stockholder
(excluding from the 85% calculation shares owned by directors who are also
officers of the corporation and shares held by employee stock plans which do not
permit employees to decide confidentially whether to accept a tender or exchange
offer); or (c) on or after the date a person becomes an Interested Stockholder,
the Board approves the Business Combination, and it is also approved at a
stockholder meeting by 66 2/3% of the voting stock not owned by the Interested
Stockholder.
Under Section 203, the restrictions described above do not apply if, among
other things, the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203. The Company's
Certificate of Incorporation does not contain such a provision. The restrictions
described above also do not apply to certain Business Combinations proposed by
an Interested Stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an Interested Stockholder during the previous three years or who
became an Interested Stockholder with the approval of a majority of the
corporation's directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer & Trust, Inc.
43
<PAGE> 50
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 2,504,597 shares of
Common Stock outstanding. Of these shares, the 1,200,000 shares sold in this
offering (and any shares sold by the Company upon exercise of the Underwriters'
over-allotment option) will be freely transferable by persons other than
"affiliates" of the Company (as that term is defined under the Act) without
restriction or further registration under the Act. An additional 4,597 shares of
Common Stock have been registered under the Act and are freely transferable by
the holders thereof commencing nine months from the date of this Prospectus.
The remaining 1,300,000 outstanding shares of Common Stock are "restricted
securities" within the meaning of Rule 144 under the Act and may not be sold in
the absence of registration under the Act unless an exemption from registration
is available, including the exemption contained in Rule 144. All of such shares
would be eligible for sale under Rule 144 commencing 90 days after the date of
this Prospectus. However, pursuant to the terms of the Underwriting Agreement,
the Representative has required that the Common Stock owned by current
shareholders not be sold until nine months from the date of this Prospectus
without the prior written consent of the Representative.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least two years is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has beneficially owned shares for at least three years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above.
In addition to the shares of Common Stock that are currently outstanding, a
total of 250,000 shares of Common Stock have been reserved for issuance upon
exercise of options granted under the Option Plan, under which options have been
granted to acquire 156,150 shares of Common Stock at a weighted average exercise
price equal to 86.7% of the assumed offering price of the Common Stock offered
hereby. Shares underlying such options are "restricted securities" and are
subject to the restrictions on transfer described above until registered.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that sales of
shares by such shareholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing shareholders could adversely affect prevailing market prices.
44
<PAGE> 51
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Cruttenden Roth Incorporated is acting as
the representative (the "Representative"), have severally agreed to purchase
from the Company and the Selling Shareholders the shares of Common Stock offered
hereby. Each Underwriter will purchase the number of shares set forth opposite
its name below, and will purchase the shares at the price to public less
underwriting discounts and commissions set forth on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Cruttenden Roth Incorporated
---------
Total..................................................................... 1,200,000
========
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to conditions precedent and that the Underwriters are committed to
purchase all shares of Common Stock offered hereby (other than those covered by
the over-allotment option described below) if the Underwriters purchase any
shares.
The Representative has advised the Company that the several Underwriters
propose to offer the shares of Common Stock in part directly to the public at
the price to public set forth on the cover page of this Prospectus, and in part
to certain dealers at the price to public less a concession not exceeding
$ per share. The Underwriters may allow, and such dealers may reallow,
a concession not exceeding $ per share to other dealers. After the
shares of Common Stock are released for sale to the public, the Representative
may change the initial price to public and other selling terms. No change in
such terms shall change the amount of proceeds to be received by the Company and
the Selling Shareholders as set forth on the cover page of this Prospectus. The
Representative will also receive a non-accountable expense allowance equal to
2 1/2% of the gross proceeds of the offering, of which $10,000 has been paid.
The Company has granted the Underwriters an option, exercisable for 45 days
after the date of this Prospectus, to purchase up to 180,000 additional shares
of Common Stock at the same price per share as the initial shares. The
Underwriters may purchase these shares solely to cover over-allotments, if any,
in connection with the sale of the shares of Common Stock offered hereby. If the
Underwriters exercise the over-allotment option, the Underwriters will purchase
additional shares in approximately the same proportions as those in the above
table.
The Representative has informed the Company and the Selling Shareholders
that it does not expect any sales of the shares of Common Stock offered hereby
to be made to discretionary accounts by the Underwriters.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters and their controlling persons
against certain liabilities under the Act or will contribute to payments the
Underwriters and their controlling persons may be required to make in respect
thereof. The Company has been advised that, in the opinion of the Commission,
such indemnification is against public policy as expressed in the Act and may
be, therefore, unenforceable.
45
<PAGE> 52
The Company's existing shareholders have agreed not to offer, sell or
otherwise dispose of any shares of Common Stock (excepting those offered by the
Selling Shareholders) for a period of nine months after the date of this
Prospectus without the prior written consent of the Representative.
The Company has also agreed to sell to the Representative, for nominal
consideration, warrants (the "Representative's Warrants") to purchase 120,000
shares of Common Stock. The Representative's Warrants will be exercisable, at a
price per share equal to 120% of the initial price to public, commencing one
year from the date hereof and for a period of four years thereafter. During the
exercise period, holders of the Representative's Warrants are entitled to
certain demand and incidental registration rights with respect to the securities
issuable upon exercise of the Representative's Warrants. The shares of Common
Stock issuable on exercise of the Representative's Warrants are subject to
adjustment in certain events to prevent dilution. The Representative's Warrants
cannot be transferred, assigned or hypothecated for a period of one year from
the date of issuance except to Underwriters, selling group members and their
officers or partners.
Prior to this offering, there has not been a public market for the Common
Stock. The public offering price of the Common Stock has been determined by
arms-length negotiation among the Company, the Selling Shareholders and the
Representative. There is no direct relation between the offering price of the
Common Stock and the assets, book value or net worth of the Company. Among the
factors considered in pricing the Common Stock were the Company's results of
operations, the current financial condition and future prospects of the Company,
the experience of management, the amount of ownership to be retained by present
shareholders, the general condition of the economy and the securities markets,
and the demand for similar securities of companies considered comparable to the
Company.
46
<PAGE> 53
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon by
Berliner Zisser Walter & Gallegos, P.C., Denver, Colorado. A partner of such
firm holds options to acquire 6,000 shares of Common Stock of the Company.
Berliner Zisser Walter & Gallegos, P.C. has represented the Representative from
time to time in other matters. Certain legal matters will be passed upon for the
Underwriters by O'Melveny & Myers LLP, Newport Beach, California.
EXPERTS
The consolidated balance sheets of the Company as of February 28, 1995 and
February 29, 1996, and the consolidated statements of income, shareholders'
equity and cash flows for the years ended February 28, 1994 and 1995 and
February 29, 1996, have been included herein in reliance on the report of Grant
Thornton LLP, independent certified public accountants, and upon the authority
of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a registration statement
(together with all amendments thereto, the "Registration Statement") under the
Act with respect to the Common Stock of the Company offered hereby. This
Prospectus, filed as part of the Registration Statement, omits certain
information contained in the Registration Statement in accordance with the rules
and regulations of the Commission. For further information, reference is hereby
made to the Registration Statement. Statements contained herein concerning the
provisions of any document are not necessarily complete and in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
47
<PAGE> 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Consolidated Balance Sheets -- February 28, 1995, February 29, 1996 and May 31, 1996
(unaudited)......................................................................... F-3
Consolidated Statements of Income -- For the fiscal years ended February 28, 1994 and
1995 and February 29, 1996 and the three months ended May 31, 1995 and 1996
(unaudited)......................................................................... F-4
Consolidated Statement of Shareholders' Equity -- For the fiscal years ended February
28, 1994 and 1995 and February 29, 1996 and the three months ended May 31, 1996
(unaudited)......................................................................... F-5
Consolidated Statements of Cash Flows -- For the fiscal years ended February 28, 1994
and 1995 and February 29, 1996 and the three months ended May 31, 1995 and 1996
(unaudited)......................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Shareholders
Q.E.P. Co., Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Q.E.P. Co.,
Inc. and Subsidiaries (the "Company") as of February 29, 1996 and February 28,
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended February 29,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Q.E.P. Co.,
Inc. and Subsidiaries as of February 29, 1996 and February 28, 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended February 29, 1996, in conformity
with generally accepted accounting principles.
We have also audited Schedule II of Q.E.P. Co., Inc. and Subsidiaries as of
February 29, 1996 and February 28, 1995, and for the periods then ended. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
New York, New York
April 30, 1996 (except for Note N, as to
which the date is June 25, 1996)
F-2
<PAGE> 56
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY
28, 29, MAY 31,
1995 1996 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash................................................... $ 114,767 $ 179,138 $ 316,074
Accounts receivable, less allowance for doubtful
accounts of $26,400 as of February 28, 1995 and
$54,500 as of February 29, 1996 and May 31, 1996.... 2,357,535 3,580,554 3,060,879
Inventories............................................ 2,704,161 3,138,681 3,370,860
Other current assets................................... 118,616 350,443 479,455
---------- ---------- ----------
Total current assets........................... 5,295,079 7,248,816 7,227,268
PROPERTY AND EQUIPMENT -- net............................ 294,686 266,610 240,666
DEFERRED INCOME TAXES.................................... 104,000 84,000 81,000
OTHER ASSETS............................................. 306,678 280,538 269,204
---------- ---------- ----------
$6,000,443 $7,879,964 $7,818,138
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities............... $1,899,002 $1,820,555 $2,131,871
Loans payable.......................................... 1,396,391 2,447,887 1,687,990
Other current liabilities.............................. 51,382 49,109 6,274
---------- ---------- ----------
Total current liabilities...................... 3,346,775 4,317,551 3,826,135
OTHER LIABILITIES........................................ 155,930 137,088 134,965
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; 2,500,000 shares
authorized, $1 par value; 568,047 issued and
outstanding at February 28, 1995 and 503,047 shares
issued and outstanding at February 29, 1996 and May
31, 1996, respectively.............................. 568,047 503,047 503,047
Common stock; 10,000,000 shares authorized, $.001 par
value; 1,515,152 shares issued and outstanding at
February 28, 1995 and 1,500,000 shares issued and
outstanding February 29, 1996 and May 31, 1996,
respectively........................................ 1,515 1,500 1,500
Additional paid-in capital............................. 30,747 30,762 30,762
Retained earnings...................................... 1,897,429 2,947,916 3,379,629
Cost of stock held in treasury......................... -- (57,900) (57,900)
---------- ---------- ----------
2,497,738 3,425,325 3,857,038
---------- ---------- ----------
$6,000,443 $7,879,964 $7,818,138
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 57
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
-------------------------------------------- ------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, MAY 31, MAY 31,
1994 1995 1996 1995 1996
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales...................... $13,407,673 $19,247,549 $25,271,715 $5,680,934 $7,702,148
Cost of goods sold............. 8,416,219 12,105,099 15,976,971 3,673,139 4,800,998
----------- ----------- ----------- ---------- ----------
Gross profit......... 4,991,454 7,142,450 9,294,744 2,007,795 2,901,150
Costs and expenses
Shipping..................... 1,113,125 1,488,243 1,745,745 234,761 565,242
General and administrative... 1,491,726 2,435,574 3,105,861 734,295 767,318
Selling and marketing........ 1,218,460 1,799,822 2,511,898 557,783 817,748
Foreign exchange losses,
net....................... 152,636 114,635 472 -- 256
----------- ----------- ----------- ---------- ----------
3,975,947 5,838,274 7,363,976 1,526,839 2,150,564
----------- ----------- ----------- ---------- ----------
Operating income..... 1,015,507 1,304,176 1,930,768 480,956 750,586
Interest expense............... 135,059 149,414 194,565 48,707 43,925
----------- ----------- ----------- ---------- ----------
Income before
provision for
income taxes....... 880,448 1,154,762 1,736,203 432,249 706,661
Provision for income taxes..... 341,032 429,312 668,452 173,800 267,500
----------- ----------- ----------- ---------- ----------
NET INCOME........... $ 539,416 $ 725,450 $ 1,067,751 $ 258,449 $ 439,161
=========== =========== =========== ========== ==========
Primary and fully diluted net
income per common share...... $ .36 $ .47 $ .70 $ .17 $ .29
=========== =========== =========== ========== ==========
Weighted average number of
shares outstanding........... 1,515,152 1,515,152 1,505,682 1,515,152 1,500,000
=========== =========== =========== ========== ==========
Pro forma net income per common
share........................ $ .67 $ .28
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 58
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ -------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK
------- -------- --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1993............ -- $ -- 200 $ 12,037 $20,225 $ 638,813 $ --
Issuance of preferred stock......... 125,000 125,000 -- -- -- -- --
Net income.......................... -- -- -- -- -- 539,416 --
------- -------- --------- -------- ------- ---------- --------
Balance at February 28, 1994........ 125,000 125,000 200 12,037 20,225 1,178,229 --
Issuance of preferred stock......... 443,047 443,047 -- -- -- -- --
Dividends........................... -- -- -- -- -- (6,250) --
Net income.......................... -- -- -- -- -- 725,450 --
------- -------- --------- -------- ------- ---------- --------
Balance at February 28, 1995........ 568,047 568,047 200 12,037 20,225 1,897,429 --
Redemption of preferred stock....... (65,000) (65,000) -- -- -- -- --
Stock split -- 7,575.76 for 1 and
change in par value............... -- -- 1,514,952 (10,522) 10,522 -- --
Dividends........................... -- -- -- -- -- (17,264) --
Purchase of treasury stock.......... -- -- (15,152) (15) 15 -- (57,900)
Net income.......................... -- -- -- -- -- 1,067,751 --
------- -------- --------- -------- ------- ---------- --------
Balance at February 29, 1996........ 503,047 503,047 1,500,000 1,500 30,762 2,947,916 (57,900)
(unaudited)
Dividends........................... -- -- -- -- -- (7,448) --
Net income.......................... -- -- -- -- -- 439,161 --
------- -------- --------- -------- ------- ---------- --------
Balance at May 31, 1996............. 503,047 $503,047 1,500,000 $ 1,500 $30,762 $3,379,629 $(57,900)
======= ======== ========= ======== ======= ========== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 59
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
-------------------------------------------- ----------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, MAY 31, MAY 31,
1994 1995 1996 1995 1996
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income........................................ $ 539,416 $ 725,450 $ 1,067,751 $ 258,449 $ 439,161
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Depreciation and amortization................... 40,590 52,209 85,131 47,479 29,831
Amortization of fair market value in excess of
cost of business acquired..................... -- (22,500) (30,000) (7,500) (7,500)
Deferred income taxes........................... 5,000 (69,500) 20,000 5,000 3,000
Changes in assets and liabilities
Accounts receivable............................. (272,321) 39,494 (1,223,019) (157,532) 519,675
Inventories..................................... (451,522) (465,224) (434,520) 95,931 (232,179)
Other current assets............................ 109,868 (13,820) (228,744) (141,155) (69,012)
Other assets.................................... 32,579 (1,929) 11,673 3,670 8,489
Accounts payable and accrued liabilities........ 67,369 (342,780) (347,220) (367,330) (121,101)
---------- --------- ----------- --------- ---------
Net cash provided by (used in) operating
activities.................................... 70,979 (98,600) (1,078,948) (262,988) 570,364
---------- --------- ----------- --------- ---------
Cash flows from investing activities
Capital expenditures.............................. (30,396) (90,501) (45,671) (13,138) (1,042)
Acquisitions, net of cash acquired................ -- (366,115) -- -- --
---------- --------- ----------- --------- ---------
Net cash used in investing activities........... (30,396) (456,616) (45,671) (13,138) (1,042)
---------- --------- ----------- --------- ---------
Cash flows from financing activities
Redemption of preferred stock..................... -- -- (65,000) (12,000) --
Net borrowings (payments) under line of credit.... (159,463) 328,329 1,051,496 137,032 (759,897)
Net borrowings (payments) of debt................. (76,437) (14,393) 8,885 (36,345) (37,458)
Cash overdraft.................................... 103,126 275,392 268,773 206,639 432,417
Dividends......................................... -- (6,250) (17,264) -- (7,448)
Issuance of preferred stock....................... 125,000 -- -- -- --
Purchase of treasury stock........................ -- -- (57,900) -- --
Payment of deferred offering costs................ -- -- -- -- (60,000)
---------- --------- ----------- --------- ---------
Net cash provided by (used in) financing
activities.................................... (7,774) 583,078 1,188,990 295,326 (432,386)
---------- --------- ----------- --------- ---------
NET INCREASE IN CASH............................ 32,809 27,862 64,371 19,200 136,936
Cash and cash equivalents at beginning of year...... 54,096 86,905 114,767 114,767 179,138
---------- --------- ----------- --------- ---------
Cash and cash equivalents at end of year............ $ 86,905 $ 114,767 $ 179,138 $ 133,967 $ 316,074
========== ========= =========== ========= =========
Noncash investing and financing activities:
In fiscal 1995, the Company purchased three
companies. In conjunction with the acquisitions,
liabilities were as follows:
Fair value of assets acquired................. $1,087,094
Less
Cash paid................................... 400,000
Note issued................................. 180,000
Preferred stock issued...................... 443,047
----------
Liabilities assumed......................... $ 64,047
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 60
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
NOTE A -- DESCRIPTION OF BUSINESS
Q.E.P. Co., Inc. (the "Company") manufactures and distributes, principally
through major home center chains predominantly located throughout the United
States, tools and related products used in the ceramic tile, masonry, dry wall
and carpeting trades.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation. The consolidated financial statements
include the accounts of Q.E.P. Co., Inc. and its wholly-owned subsidiaries after
eliminating all significant intercompany accounts and transactions.
2. Inventories. Inventories are stated at the lower of average cost or
market.
3. Income Taxes. Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end.
4. Intangible Assets. Intangible assets are recorded at cost and are
amortized over the estimated periods of related benefit using the straight-line
method.
5. Leases. Leases which meet certain criteria are classified as capital
leases. For such leases, assets and obligations are recorded initially at the
fair market values of the leased assets. The capitalized leases are amortized
using the straight-line method over the assets' estimated economic lives.
Interest expense relating to the lease liabilities is recorded to effect a
constant rate of interest over the terms of the obligations. Leases not meeting
capitalization criteria are classified as operating leases and related rentals
are charged to expense as incurred.
6. Revenue Recognition. Sales are recognized when merchandise is shipped.
7. Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization are provided by straight-line methods in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the life of
the respective lease.
The following are the estimated lives of the Company's fixed assets:
<TABLE>
<S> <C>
Machinery and warehouse equipment..................... 3 to 10 years
Furniture and equipment............................... 3 to 5 years
Capital leases........................................ 3 to 5 years
Building.............................................. 30 to 33 years
</TABLE>
Maintenance and repairs are charged to expense, while significant renewals
and betterments are capitalized. When property is sold or otherwise disposed of,
the cost and related depreciation are removed from the accounts, and any
resulting gain or loss is reflected in operations for the period.
8. Advertising Costs. All costs related to advertising are expensed in the
period incurred.
9. Net Income per Common Share. Primary and fully diluted net income per
common share is computed using the weighted average number of common shares
outstanding. The computation reduces the net income available per common share
by the amount of preferred stock dividends.
10. Use of Estimates. 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
F-7
<PAGE> 61
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
11. Fair Value of Financial Instruments. Based on borrowing rates currently
available to the Company for bank loans with similar terms and maturities, the
fair value of the Company's short-term debt approximates the carrying value.
Furthermore, the carrying value of all other financial instruments potentially
subject to valuation risk (principally consisting of cash, accounts receivable
and accounts payable) also approximates fair value.
12. Interim Financial Statements. The consolidated financial statements at
May 31, 1996 and for the three months ended May 31, 1995 and 1996 are unaudited.
In the opinion of the Company, the unaudited consolidated financial statements
at May 31, 1996 and for the three months ended May 31, 1995 and 1996, include
all adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial position and results of operations for such
periods. Results of operations for the three months ended May 31, 1996 are not
necessarily indicative of results to be expected for the full year.
13. Cash Equivalents. The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
14. Reclassification. Certain reclassifications have been made to conform
to the 1996 presentation.
NOTE C -- ACQUISITIONS
1. Andrews Enterprises. Effective January 1, 1995, the Company purchased
all of the assets of Andrews Enterprises, which manufactures drywall and paint
tools for $50,000 in notes and 17,500 shares of $1 par value preferred stock,
for a total purchase price of $67,500. The acquisition has been accounted for as
a purchase, and, accordingly, the operating results since the date of the
acquisition of Andrews have been included in the accompanying financial
statements. The purchase price was allocated to assets acquired based on their
estimated fair values. The excess of the total acquisition cost over the fair
value of net assets acquired in the amount of $17,400 (included in other assets)
is being amortized on a straight-line basis over fifteen years. Accumulated
amortization at February 28, 1995, February 29, 1996 and May 31, 1996 was $200,
$1,400, and $1,600, respectively.
2. Marion Tool and Westpoint Foundry. Effective October 31, 1994, the
Company purchased all the common stock of Marion Tool, which manufactures grey
iron castings, trowels, other small hand tools, and assembles striking tools and
garden tools, for 425,547 shares of $1 par value preferred stock, for a total
purchase price of $425,547. The acquisition has been accounted for as a
purchase, and, accordingly, the operating results of Marion Tool have been
included in the accompanying financial statements since the date of acquisition.
The purchase price was allocated to assets acquired based on their estimated
fair values. The excess total acquisition cost over the fair value of net assets
acquired of approximately $52,000 (included in other assets) is to be amortized
on a straight-line basis over fifteen years. Accumulated amortization at
February 28, 1995, February 29, 1996 and May 31, 1996 was $2,000, $3,600, and
$4,200, respectively.
3. O'Tool Company. On June 9, 1994, the Company purchased all the assets
and assumed certain liabilities of O'Tool Company, which distributes masonry and
carpentry tiling tools for $580,000, consisting of $400,000 in cash and $180,000
in notes, which have since been paid in full. The acquisition has been accounted
for as a purchase, and, accordingly, the operating results of O'Tool since the
acquisition have been included in the accompanying financial statements since
the date of acquisition. The excess of the fair value of net assets over the
acquisition cost in the amount of $150,000 (included in other liabilities) is
being amortized on a straight-line basis over five years. Accumulated
amortization at February 28, 1995, February 29, 1996 and May 31, 1996 was
$22,500, $52,500, and $60,000, respectively.
F-8
<PAGE> 62
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
The following unaudited pro forma consolidation shows the results of
operations assuming that the above purchases occurred on March 1, 1993. The
unaudited pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Net sales......................................... $18,492,058 $22,259,245
Net income........................................ 458,512 267,936
</TABLE>
NOTE D -- INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, MAY 31,
1995 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Raw materials and work-in-progress............... $ 444,006 $ 376,433 $ 569,468
Finished goods................................... 2,260,155 2,762,248 2,801,392
---------- ---------- ----------
$2,704,161 $3,138,681 $3,370,860
========== ========== ==========
</TABLE>
NOTE E -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, MAY 31,
1995 1996 1996
------------ ------------ ---------
<S> <C> <C> <C>
Land.............................................. $ 7,509 $ 7,509 $ 7,509
Machinery and warehouse equipment................. 313,864 292,278 295,415
Office furniture and equipment.................... 110,813 178,069 175,974
Capital leased equipment.......................... 48,300 48,300 48,300
Building and leasehold improvements............... 162,533 132,727 132,727
--------- --------- ---------
643,019 658,883 659,925
Less accumulated depreciation and amortization.... (348,333) (392,273) (419,259)
--------- --------- ---------
$ 294,686 $ 266,610 $ 240,666
========= ========= =========
</TABLE>
NOTE F -- LOANS PAYABLE
The Company has a bank credit facility which permits borrowings of up to
$3,250,000 as revolving credit against a fixed percentage of eligible accounts
receivable and inventory, as defined. Interest is payable monthly at the bank's
base lending rate (8.25% at February 29, 1996 and May 31, 1996) plus 1/2%, or
the LIBOR plus 225 basis points (7.56% at February 29, 1996 and 7.25% at May 31,
1996). The loan agreement is through June 30, 1998. Under the most restrictive
covenants of the loan agreement, the Company is required to maintain a minimum
tangible net worth of $2,600,000. The Company is also required to maintain a
minimum Interest Coverage Ratio, and a specified debt to tangible net worth
ratio for each fiscal year. As of February 28, 1995, February 29, 1996 and May
31, 1996, the Company was in compliance with these covenants.
F-9
<PAGE> 63
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
The line of credit is collateralized by substantially all of the assets of
the Company and is guaranteed up to $500,000, by the Company's majority
shareholder.
The terms of the Company's bank credit facility prohibit the payment of
dividends, except with the lender's consent. The Company is obligated to pay
cumulative dividends, for which lender's consent has been obtained, in varying
amounts on the Series A and Series C Preferred Stock and a fixed, noncumulative
dividend on the Series B Preferred Stock (Note L).
Letters of credit are issued by the Company during the ordinary course of
business through major domestic banks as required by certain vendor agreements.
The Company had approximately $331,000 and $67,000 as of February 28, 1995 and
February 29, 1996, respectively, and $575,000, and $101,000 as of May 31, 1995
and 1996, respectively, of outstanding letters of credit.
Interest paid for all debt was $136,834, $151,639 and $218,367 in fiscal
1994, 1995 and 1996, respectively, and $45,836 and $50,916 for the three months
ended May 31, 1995 and 1996, respectively.
NOTE G -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, MAY 31,
1995 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Accounts payable................................ $1,065,909 $1,055,759 $ 918,853
Accrued payroll and employee benefits........... 302,435 399,127 413,051
Accrued liabilities............................. 355,944 365,669 617,508
Accrued income taxes............................ 174,714 -- 182,459
---------- ---------- ----------
$1,899,002 $1,820,555 $2,131,871
========== ========== ==========
</TABLE>
NOTE H -- COMMITMENTS AND CONTINGENCIES
1. Future Minimum Obligation. The Company conducts its operations from
various leased facilities. Future minimum payments under noncancellable
operating leases consist of the following in fiscal years ending after February
29, 1996:
<TABLE>
<S> <C>
1997...................................................... $277,778
1998...................................................... 55,691
1999...................................................... 34,046
2000...................................................... 5,674
--------
Total minimum lease payments.............................. $373,189
========
</TABLE>
Total rent expense under noncancellable operating leases approximated
$404,000, $350,000 and $232,000 in fiscal 1996, 1995 and 1994, respectively, and
$53,000 and $60,000 for the three months ended May 31, 1995 and 1996,
respectively.
In fiscal 1995 and 1994, the President and majority shareholder subleased
an operating facility to the Company at a rate equivalent to what the President
and majority shareholder was being charged. Rent expense for this facility
included in total rent expense above was approximately $83,000 and $86,000 in
fiscal 1994 and 1995, respectively. The Company also rented another facility on
a month-to-month basis from a
F-10
<PAGE> 64
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
shareholder. Rent expense for this facility was approximately $18,000 and $7,000
in fiscal 1994 and 1995, respectively.
2. Marion Tool Company. In October 1994, the Company acquired all of the
outstanding common stock of Marion Tool Company which manufactures specialty
tools and related castings (Note C). In connection with this acquisition, the
Company also acquired the land underlying the Marion Tool facility and warehouse
and the foundry operations known as Westpoint Foundry in Marion, Indiana. Prior
to undertaking the acquisition, the Company commissioned a series of
environmental reports by an independent consulting firm of both the Marion Tool
Company and Westpoint Foundry facilities and the associated real estate. The
consultant's environmental report stated that samples of foundry sand and slag
deposited on the real estate were tested and determined not to constitute
hazardous waste. Based on the testing the consultants indicated that such
deposits do not appear to have affected ground water resources. In addition, the
consultant noted the presence of above ground storage tanks from which some
petroleum contamination was evident. The above ground storage tanks were removed
at the time of the acquisition and the Company caused the contaminated soil to
be removed in accordance with applicable environmental laws. Because of the
proximity of soil contamination to several structures and improvements at the
site and the risk that removal could undermine the structures, all contaminated
soil was not removed. A report of the excavation results were submitted to the
Indiana Department of Environmental Management and, based upon its discussions
with such department, the Company believes that no further action will be
required concerning the remaining contamination.
The environmental reports prepared by the consultant also noted that Marion
Tool Company was identified as a potentially responsible party ("PRP"), pursuant
to the Comprehensive Environmental Response, Compensation and Liability Act of
1980 as amended ("CERCLA"), for the cleanup of contamination resulting from past
disposal of hazardous wastes at certain sites to which Marion Tool Company,
among others, sent wastes in the past. CERCLA requires PRPs to pay for cleanup
of sites from which there has been a release or threatened release of hazardous
substances. Based upon, among other things, a review of the data available to
the Company regarding the site at which Marion Tool Company is alleged to have
deposited a portion of the waste located thereon, and a comparison of the
potential liability at this site to settlements reached by other parties in
similar cases, the Company believes that Marion Tool Company's liability for
this matter will not have a material adverse effect on the Company's financial
condition or results of operations. Although the Company does not believe that
Marion Tool Company has other potential off-site liability, if other disposal
sites where Marion Tool Company sent waste are determined to require cleanup
under CERCLA or other similar laws, Marion Tool Company could face similar
claims in the future. The Company has not received notice of any claims relating
to disposal of waste by Marion Tool Company at any other sites.
Pursuant to the terms of an escrow agreement by and among the Company and
the sellers of the Marion Tool Company, the sellers agreed to deposit
certificates representing the 425,547 shares of Series A Preferred Stock in an
escrow account at the date of closing. The escrow agent is authorized to release
the shares of Preferred Stock to the Company within 15 days after receipt of a
written statement, in form and substance satisfactory to the escrow agent in its
discretion, providing that there has been a material breach of the
representations and warranties of the sellers contained in the stock purchase
agreement. In the event of a dispute as to the existence of a breach of a
representation or warranty, the escrow agent is authorized to retain the
certificates representing the shares of a Preferred Stock pending resolution of
a dispute among the parties, or may interplead the certificates into the
registry of a court of competent jurisdiction. Upon the expiration of six years
from the closing date and in the absence of a notice of breach of
representations and warranties by the sellers, the escrow agent is authorized to
deliver the certificates representing the shares of Preferred Stock to the
sellers. The stock purchase agreement between the Company and the sellers of
Marion Tool Company
F-11
<PAGE> 65
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
provided that Marion Tool Company had not committed any violation of any
environmental laws or regulations, and further represented that there was no
situation requiring remedial action by Marion Tool Company under any
environmental laws or regulations. The stock purchase agreement also contained a
joint and several indemnification by Marion Tool Company and each of its
shareholders in favor of the Company.
To date, the Company has not notified the escrow agent of a violation of
any environmental laws or regulations, or any situation requiring remedial
action by the Company, or any other violation of a representation or warranty,
pursuant to which the Company claims the right to the return of any of the
Series A Preferred Stock. After taking into account 106,389 shares of Series A
Preferred Stock which will convert into shares of Common Stock on the date of
this Prospectus, there are issued and outstanding 319,158 shares of Series A
Preferred Stock, par value $1.00 per share, which will be held in escrow through
August 2000 and which are subject to return to the Company in accordance with
the terms of the escrow agreement. See Note N.
NOTE I -- PENSION PLAN
Profit Sharing and 401(k) Plan. Effective March 1, 1995, the Company
merged, and amended and restated, its prior defined contribution profit sharing
plan and its prior 401(k) plan into a revised plan to provide retirement income
to substantially all employees. Matching contributions to the plan are
discretionary and are determined annually by the Board of Directors. For the
years ended February 28, 1994 and 1995 and February 29, 1996, the Company
contributed $116,000, $172,000 and $225,000, respectively. No amounts were
contributed by the Company for the three months ended May 31, 1995 and 1996,
respectively, to the plan.
NOTE J -- INCOME TAXES
The components of the provision for taxes on income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
-------------------------------------------- --------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, MAY 31, MAY 31,
1994 1995 1996 1995 1996
------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
U. S. Federal
Current tax provision.............. $284,232 $420,150 $558,118 $146,800 $226,000
Deferred tax (benefit) provision... 4,000 (60,000) 15,500 5,000 3,000
-------- -------- -------- -------- --------
288,232 360,150 573,618 151,800 229,000
-------- -------- -------- -------- --------
State
Current tax provision.............. 51,800 78,662 90,334 22,000 38,500
Deferred tax (benefit) provision... 1,000 (9,500) 4,500 -- --
-------- -------- -------- -------- --------
52,800 69,162 94,834 22,000 38,500
-------- -------- -------- -------- --------
Total income tax provision........... $341,032 $429,312 $668,452 $173,800 $267,500
======== ======== ======== ======== ========
</TABLE>
The provision for income taxes reflects the use of the liability method
under SFAS No. 109.
Cash paid for income taxes was $155,542, $300,352 and $897,364 in fiscal
1994, 1995 and 1996, respectively, and $120,337 and $13,000 for the three months
ended May 31, 1995 and 1996, respectively.
F-12
<PAGE> 66
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
The tax effects of temporary differences which gave rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, MAY 31,
1995 1996 1996
------------ ------------ ---------
<S> <C> <C> <C>
Provision for doubtful accounts................... $ 22,655 $ 20,745 $ 20,745
Accrued expenses.................................. 20,256 10,456 7,557
Fixed assets...................................... 61,089 61,654 60,437
Inventory......................................... -- (8,855) (7,739)
Net operating loss carryforward................... 137,000 137,000 137,000
--------- --------- ---------
241,000 221,000 218,000
Valuation allowance............................... (137,000) (137,000) (137,000)
--------- --------- ---------
Net deferred tax asset............................ $ 104,000 $ 84,000 $ 81,000
========= ========= =========
</TABLE>
On October 31, 1994, the Company acquired Marion Tool Corp. ("Marion") (see
Note C). Marion has a $356,000 net operating loss carryforward that begins to
expire in February 2006 and is subject to two limitations: first, IRC Section
382 limits the Company's utilization of its net operating losses to an annual
amount; second, the separate return limitation year ("SRLY") limitation permits
an offset to the current consolidated taxable income only to the extent of
taxable income attributable to the member with the SRLY loss. Since the
potential utilization of the net operating loss is uncertain, a valuation
allowance has been established to reduce this deferred tax asset to zero.
The Company's Federal tax returns have been examined by the Internal
Revenue Service through February 28, 1991.
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
----------------------------------------------------------- ---------------------------------------
FEBRUARY 28, 1994 FEBRUARY 28, 1995 FEBRUARY 29, 1996 MAY 31, 1995 MAY 31, 1996
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Provision for Federal
income taxes at the
statutory rate......... $299,352 34.0% $392,619 34.0% $590,309 34.0% $146,965 34.0% $240,265 34.0%
State and local income
taxes, net of Federal
income tax benefit..... 34,188 3.9 51,917 4.5 59,620 3.4 14,520 3.4 25,410 3.6
Other.................... 7,492 0.8 (15,224) (1.3) 18,523 1.1 12,315 2.8 1,825 0.2
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Actual provision for
income taxes........... $341,032 38.7% $429,312 37.2% $668,452 38.5% $173,800 40.2% $267,500 37.8%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
NOTE K -- SIGNIFICANT CUSTOMER AND VENDOR INFORMATION
1. Significant Customer Information. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company's customer base includes a high
concentration of home center chains with two customers representing 54%, 46% and
51%, and 8%, 9% and 10% of sales in fiscal 1994, 1995 and 1996, respectively.
These same two customers represented 46%, 42% and 55%, and 8%, 6% and 11% of
accounts receivable at February 28, 1994 and 1995, and February 29, 1996,
respectively, and 49%, 50% and 9%, 12% of sales for the three months ended May
31, 1995
F-13
<PAGE> 67
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
and 1996, respectively, and 41% and 8% of accounts receivable as of May 31,
1996. Although the Company is directly affected by the well-being of the home
center industry, management does not believe significant credit risk exists at
February 29, 1996.
2. Significant Vendor Information. The Company purchased 16%, 26% and 19%,
and 15%, 13% and 10% for the years ended February 28, 1994 and 1995 and February
29, 1996, respectively, and 19%, 16% and 14%, 12% for the three months ended May
31, 1995 and 1996, respectively, of total purchases through two vendors. The
Company believes that alternative sources of supply are readily available and
that the loss of any vendor would not materially affect the Company's
operations.
NOTE L -- SHAREHOLDERS' EQUITY -- PREFERRED STOCK
During fiscal 1994, the Board of Directors of the Company authorized the
future issuance of a maximum of 2,500,000 shares of $1 preferred stock (See Note
N).
Series A
500,000 of the Company's 2,500,000 authorized shares of preferred stock, $1
par value per share, shall be designated as Series A Preferred Stock. The
holders of each share of Series A Preferred Stock shall be entitled to receive,
before any dividends shall be declared or paid on or set aside for the Company's
common stock, out of funds legally available for that purpose, cumulative
dividends in cash at the rate of $.035 per share per annum for a period ending
September 30, 2000, payable in semiannual installments, accruing from the date
of issuance of the shares. Commencing October 1, 2000, the rate of dividends
will equal the prime interest rate on the first day of the month in which the
dividends are payable, less 1 1/4%. The Company may redeem any or all of the
shares of Series A Preferred Stock outstanding at a price per share of $1.07
plus an amount equal to any accrued but unpaid dividends thereon during the
first year following the issuance of such shares and such price shall be reduced
by one percent (1%) each year thereafter until $1.00 per share is reached. The
Series A Preferred Stock has no voting rights. During fiscal 1995, the Company
issued 425,547 shares of Series A preferred stock in connection with a business
acquisition (see Note C). There were $0 and $13,653 dividends declared and paid
during the fiscal years 1995 and 1996. There were $0 and $7,448 dividends
declared for the three months ended May 31, 1995 and 1996.
Series B
1,000,000 of the Company's 2,500,000 authorized shares of preferred stock,
$1 par value per share, shall be designated as Series B Preferred Stock. The
holder of each share of Series B Preferred Stock shall be entitled to receive,
out of the surplus of the Company, a noncumulative dividend at the rate of $.05
per share per annum, payable annually before any dividend shall be set apart for
or paid on the common shares for such years. The Series B Preferred Stock has no
voting rights. The Company may redeem any or all of the shares of Series B
Preferred Stock then outstanding at a price per share of $1.00. During fiscal
1994, 125,000 shares of Series B Preferred Stock were issued for $125,000 to
three suppliers. There were $6,250 and $3,000 of dividends declared and paid in
fiscal years 1995 and 1996, respectively. In 1996, the Company bought back
65,000 shares at a price of $1.00 per share from one supplier. No dividends were
declared or paid for the three months ended May 31, 1995 and 1996.
Series C
1,000,000 of the Company's 2,500,000 authorized shares of preferred stock,
$1 par value per share, shall be designated as Series C Preferred Stock. The
holder of each share of Series C Preferred Stock shall be
F-14
<PAGE> 68
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
entitled to receive, before any dividends shall be declared or paid on or set
aside for the Company's common stock, out of funds legally available for that
purpose, cumulative dividends at the rate of $.035 per share per annum, payable
in annual installments, accruing from the date of issuance of the shares. The
Series C Preferred Stock has no voting rights. The Company may redeem any or all
of the shares of Series C Preferred Stock then outstanding at a price per share
of $1.00. During fiscal year 1995, 17,500 shares of Series C Preferred Stock
were issued in connection with a business acquisition (see Note C). No dividends
were declared or due in fiscal year 1995 on these shares. In fiscal year 1996,
dividends of approximately $600 in aggregate at $.035 per share were in arrears
due to the Company being unable to distribute dividends due to change of
ownership of these shares. No dividends were declared or paid for the three
months ended May 31, 1995 and 1996.
Treasury Stock
Total common shares purchased in fiscal year 1996 and held in treasury were
15,152 shares for an aggregate cost of $57,900.
NOTE M -- FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected future cash flows
(undiscounted) is less than the carrying amount of the asset, an impairment loss
is recognized. Measurement of that loss would be based on the fair value of the
asset. SFAS No. 121 also generally requires long-lived assets and certain
identifiable intangibles to be disposed of to be reported at the lower of the
carrying amount or the fair value less cost to sell. Effective March 1, 1996 the
Company adopted SFAS No. 121 and no impairment losses have been recognized.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 defines a fair value based method
of accounting for an employee stock option. Fair value of the stock option is
determined considering factors such as the exercise price, the expected life of
the option, the current price of the underlying stock and its volatility,
expected dividends on the stock, and the risk-free interest rate for the
expected term of the option. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period. A company may elect to adopt SFAS No. 123 or
elect to continue accounting for its stock option or similar equity awards using
the intrinsic method, where compensation cost is measured at the date of grant
based on the excess of the market value of the underlying stock over the
exercise price. If a company elects not to adopt SFAS No. 123, then it must
provide pro forma disclosure of net income and earnings per share, as if the
fair value based method has been applied.
SFAS No. 123 is effective for transactions entered into for fiscal years
that begin after December 15, 1995. Pro forma disclosures for entities that
elect to continue to measure compensation cost under the old method must include
the effects of all awards granted in fiscal years that begin after December 15,
1994. Effective March 1, 1996, the Company has elected to account for
stock-based compensation plans under the intrinsic method and pro forma
disclosures will be made at February 28, 1997.
F-15
<PAGE> 69
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1994 AND 1995 AND FEBRUARY 29, 1996
AND MAY 31, 1995 AND 1996
(INFORMATION RELATING TO MAY 31, 1995 AND 1996 IS UNAUDITED)
NOTE N -- SUBSEQUENT EVENTS
1. Initial Public Offering. The Company intends to offer 1,000,000 shares
of common stock to the general public through an initial public offering (the
"Offering").
Costs deferred in connection with the Offering of the Company's common
stock are charged against paid-in capital upon successful completion of the
Offering. If the Offering is unsuccessful, such costs will be charged to
expense.
2. Reincorporation. The Company was originally incorporated in New York in
1979. In connection with the Offering, the Company intends to reincorporate in
August 1996 as a Delaware corporation with the same name and the New York
corporation will be merged into it, continuing the business of the Company.
3. Employment Agreement. Prior to the date of the Offering, the Company
intends to enter into an employment agreement with its President for an initial
term expiring in three years at an initial annual base salary of $275,000, which
is to be adjusted for increases in the cost of living, plus a bonus based upon
the discretion of the Board of Directors.
4. Stock Option Plan. The Company has adopted a stock option plan (the
"Plan") for employees, consultants and directors of the Company. Stock options
granted pursuant to the Plan shall be authorized by the Board of Directors. The
aggregate number of shares which may be issued under the Plan shall not exceed
250,000 shares of common stock. As of May 31, 1996, the Company has not granted
any stock options or stock appreciation rights to any person.
5. Conversion of Preferred Stock. Upon completion of the Offering, the
Company will convert 183,889 shares of outstanding preferred stock into 4,597
shares of common stock. Included in the shares to be converted is 106,387 shares
of Series A Preferred Stock. To the extent that the Series A shares are
converted to Common Stock, the value of the Preferred Stock available for return
to the Company under the escrow agreement will be reduced by $106,337 (See Note
H). The incremental common stock outstanding would not result in a change in net
income per common share included in the accompanying financial statements.
6. Pro forma net income per common share. Pro forma net income per common
share reflects the issuance of 190,000 and 168,799 shares of common stock
necessary to repay $1,900,000 and $1,687,990 of debt, including the elimination
of $94,000 and $27,000 of interest expense net of income taxes, for the year
ended February 29, 1996 and the three months ended May 31, 1996, respectively.
F-16
<PAGE> 70
Q.E.P. CO., INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------ ----------- -------------------- --------- ----------
(2)
(1) CHARGED
BALANCE AT CHARGED TO TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (A) PERIOD
- ------------------------------------------ ----------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended February 28, 1995
Deducted from asset accounts
Allowance for doubtful accounts...... $17,500 $ 8,900 $ -- $26,400
======= ======= ======= =======
Year ended February 29, 1996
Deducted from asset accounts
Allowance for doubtful accounts......... $26,400 $28,100 $ -- $54,500
======= ======= ======= =======
</TABLE>
- ---------------
(a) Accounts written off as uncollectible.
F-17
<PAGE> 71
Presented on the inside back cover are six pictures of home centers
operated by the Company's home improvement retail customers under the
following caption:
"Pictured below are retail locations operated by six of the Company's
largest customers which currently purchase a variety of specialty tools and
related products from the Company or its subsidiaries. The Company has no
other affiliation with the customers pictured below."
The inside back cover also includes a listing of the major product categories
sold by the Company, a picture of the Company's products as presented in a home
center owned by a customer, and a copy of the Company's logo. All the pictures
are set against a backdrop of a customer standing next to a display of the
Company's products.
<PAGE> 72
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------------------
TABLE OF CONTENTS
---------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 5
Use of Proceeds......................... 12
Dividend Policy......................... 12
Dilution................................ 13
Capitalization.......................... 14
Selected Consolidated Financial Data.... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 16
Business................................ 22
Management.............................. 36
Principal Shareholders.................. 41
Selling Shareholders.................... 42
Plan of Distribution.................... 42
Description of Securities............... 42
Shares Eligible for Future Sale......... 44
Underwriting............................ 45
Legal Matters........................... 47
Experts................................. 47
Additional Information.................. 47
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,597 SHARES
[QEP LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 73
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------------------
TABLE OF CONTENTS
---------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 5
Use of Proceeds......................... 12
Dividend Policy......................... 12
Dilution................................ 13
Capitalization.......................... 14
Selected Consolidated Financial Data.... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 16
Business................................ 22
Management.............................. 36
Principal and Selling Shareholders...... 41
Selling Shareholders.................... 42
Plan of Distribution.................... 42
Description of Securities............... 42
Shares Eligible for Future Sale......... 44
Underwriting............................ 45
Legal Matters........................... 47
Experts................................. 47
Additional Information.................. 47
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,200,000 SHARES
[QEP LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CRUTTENDEN ROTH
INCORPORATED
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other expenses in connection with this offering which will be paid by
Q.E.P. Co., Inc. (hereinafter in this Part II, the "Company") are estimated to
be substantially as follows:
<TABLE>
<CAPTION>
AMOUNT
PAYABLE
BY THE
ITEM COMPANY*
------------------------------------------------------------------------ -----------
<S> <C>
S.E.C. Registration Fees................................................ $ 5,534.62
N.A.S.D. Filing Fees.................................................... 2,105.04
State Securities Laws (Blue Sky) Fees................................... 25,000.00*
Nasdaq National Market Filing Fee....................................... 15,000.00
Printing and Engraving.................................................. 58,000.00*
Legal Fees.............................................................. 125,000.00*
Representative's Non-Accountable Expense Allowance...................... 250,000.00
Accounting Fees and Expenses............................................ 70,000.00*
Transfer Agent's Fees and Cost of Certificates.......................... 5,000.00*
Miscellaneous Expenses.................................................. 19,360.34*
-----------
Total......................................................... $575,000.00*
===========
</TABLE>
- ---------------
* Estimated for the purpose of this filing.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law permits a corporation organized
thereunder to indemnify its directors and officers for certain of their acts.
The Certificate of Incorporation of the Company has been framed so as to conform
to the Delaware General Corporation Law. (Reference is made to the Certificate
of Incorporation filed as Exhibit 3.1.1 to this Registration Statement.)
In general, any officer, director, employee or agent may be indemnified
against expenses, fines, settlements or judgments arising in connection with a
legal proceeding to which such person is a party, if that person's actions were
in good faith, were believed to be in the Company's best interest and were not
unlawful. Unless such person is successful upon the merits in such an action,
indemnification may be awarded only after a determination by independent
decision of the Board of Directors, by legal counsel or by a vote of the
shareholders that the applicable standard of conduct was met by the person to be
indemnified.
The circumstances under which indemnification is granted in connection with
an action brought on behalf of the Company are generally the same as those set
forth above; however, with respect to such actions, indemnification is granted
only with respect to expenses actually incurred in connection with the defense
or settlement of the action. In such actions, the person to be indemnified must
have acted in good faith, in a manner believed to have been in the Company's
best interest and with respect to which such person was not adjudged liable for
negligence or misconduct.
Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future pursuant to a vote of shareholders or
directors. The statutory provision cited above and the referenced portion of the
Certificate of Incorporation also grant the power to the Company to purchase and
maintain insurance which protects its officers and directors against any
liabilities incurred in connection with their services in such a position, and
such a policy may be obtained by the Company in the future.
II-1
<PAGE> 75
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Effective October 31, 1994, the Company purchased all of the common stock
of Marion Tool Company. The purchase price paid for such stock included 425,547
shares of Series A Preferred Stock, which were issued to the shareholders of
Marion Tool Company at a price of $1.00 per share. The shareholders of Marion
Tool Company at the date of the acquisition were Phyllis Oradat, Perry White and
Russell White. Effective January 1, 1995, the Company purchased all of the
assets of Andrews Enterprises. The purchase price paid for such assets included
17,500 shares of Series C Preferred Stock, which were issued at a price of $1.00
per share. The shareholders of Andrews Enterprises at the date of the
acquisition were John Andrews, James Andrews, Nancy Andrews, Robert Andrews and
Mary Porras. The sales of Series A and Series C Preferred Stock were not
registered under the Securities Act of 1933. The Company has made the following
sales of its Series B Preferred Stock within the past three years to the
following persons for the cash consideration indicated, which sales were not
registered under the Securities Act of 1933.
<TABLE>
<CAPTION>
DATE OF PRICE NUMBER
NAME ISSUANCE CONSIDERATION PER SHARE OF SHARES
--------------------------------------------- -------- ------------- --------- ---------
<C> <S> <C> <C> <C> <C>
1. Beacon Hills Tools Co........................ 12/09/93 $10,000 $1.00 10,000
2. Kanzawa Precision Tools Manufacturing Co,
Ltd........................................ 12/09/93 50,000 1.00 50,000
3. T.M. Enterprise.............................. 12/09/93 65,000 1.00 65,000
</TABLE>
Effective June 30, 1996, the Company agreed to issue a total of 4,597
shares of Common Stock to the existing shareholders of the Company identified
below in exchange for a total of 183,889 shares of Preferred Stock owned by such
shareholders. No commission or other remuneration was paid or given directly or
indirectly for soliciting such exchange.
<TABLE>
<CAPTION>
NUMBER OF
DATE OF PREFERRED SHARES NUMBER OF
NAME ISSUANCE SURRENDERED COMMON SHARES
------------------------------------------------ -------- ---------------- -------------
<C> <S> <C> <C> <C>
1. Russell White................................... 6/30/96 106,365 2,659
2. Kanzawa Precision Tools Manufacturing Co,
Ltd........................................... 6/30/96 50,002 1,250
3. Beacon Hill Tools Co............................ 6/30/96 10,000 250
4. John Andrews.................................... 6/30/96 7,880 197
5. James Andrews................................... 6/30/96 2,640 66
6. Nancy Andrews................................... 6/30/96 2,640 66
7. Robert Andrews.................................. 6/30/96 2,640 66
8. Mary Porras..................................... 6/30/96 1,722 43
</TABLE>
All the foregoing sales were made to individuals or entities which had
access to information enabling them to evaluate the merits and risks of the
investment by virtue of their relationship to the Company or their economic
bargaining power.
The Company relied on Section 3(a)(9) of the Securities Act of 1933 for the
exemption from the registration requirements of such Act with respect to the
recapitalization and reincorporation of the Company in Delaware on ,
1996 and the exchange of Preferred Stock effective June 30, 1996. The Company
relied on Section 4(2) of the Securities Act of 1933 with respect to the private
sales of Preferred Stock for the exemption from the registration requirements of
such Act. Each investor was furnished with information concerning the operations
of the Company and each had the opportunity to verify the information supplied.
Additionally, the Company obtained a signed representation from each of the
foregoing persons or entities of his or its intent to acquire the Preferred
Stock of the Company for the purpose of investment only, and not with a view
toward the subsequent distribution thereof; and each of the certificates
representing the Preferred Stock issued to the foregoing persons or entities has
been stamped with a legend restricting transfer of the Preferred Stock
represented thereby.
In June 1996, the Company issued an aggregate of 156,150 options to acquire
shares of its Common Stock. Options issued to employees of the Company were
incentive stock options, while options issued to
II-2
<PAGE> 76
directors and to a partner of a law firm which serves as legal counsel to the
Company were non-qualified options. An aggregate of 131,300 options were issued
to the officers, directors and counsel to the Company, while the remaining
14,850 options were issued to 38 employees of the Company. All options are
exercisable commencing January 1, 1997, with the exception of options to
purchase 30,000 shares of Common Stock subject to certain vesting requirements
and issued to Patrick L. Daggett. No consideration was received by the Company
in connection with the issuance of such options. For further information
regarding the issuance of such options, see "Management -- Executive
Compensation" and "Legal Matters" in the Prospectus contained in this
Registration Statement. The Company relied on section 4(2) of the Securities Act
of 1933 with respect to the issuance of options to all such persons.
ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
The following is a complete list of Exhibits filed as part of this
Registration Statement and which are incorporated herein.
<TABLE>
<CAPTION>
EXHIBIT NO.
- --------------------
<C> <S>
+1.1 -- Form of Underwriting Agreement by and between Q.E.P. Co., Inc. (the
"Company") and Cruttenden Roth Incorporated (the "Representative")
+2.1 -- Form of Agreement and Plan of Merger regarding the change in domicile
of the Company from a New York corporation to a Delaware corporation.
*3.1.1 -- Form of Certificate of Incorporation of the Company as filed on
, 1996 with the Secretary of State of the State of
Delaware.
*3.2.1 -- Form of By-laws of the Company.
+3.3 -- Form of Indemnification Agreement to be executed by the officers and
directors of the Company and the Company.
+4.1 -- Form of specimen certificate for Common Stock of the Company.
+4.1.1 -- Form of Representative's Warrant to be issued by the Company to the
Representative.
+5. -- Opinion of Berliner Zisser Walter & Gallegos, P.C., regarding
legality of the securities covered by this Registration Statement.
+9. -- Voting Trust Agreement, dated August 3, 1996, by and between Lewis
Gould and Susan J. Gould.
+10.1 -- Employment Agreement, dated August 3, 1996, by and between Lewis
Gould and the Company.
+10.1.1 -- 1996 Stock Option Plan, effective June 20, 1996, authorizing 250,000
shares of Common Stock for issuance pursuant to the Plan.
*10.2.1 -- Lease Agreement, dated March 1, 1989, by and between Boca Commercial
Industrial Ltd. and the Company.
*10.2.2 -- Lease Agreement, dated November 1, 1992, by and between Miles Bros.
Construction and The Andrews Company.
*10.2.3 -- Lease Agreement, dated January 3, 1991, by and between
JMB/Pennsylvania Advisors and The O'Tool Company, Inc, including
Assignment of Lease dated June 9, 1994 by and between The O'Tool
Company, Inc. and the Company.
*10.2.4 -- Lease Agreement, dated December 1994, by and between Connecticut
Mutual Life Insurance Company and the Company, including amendments
thereto dated March 8, 1995 and November 21, 1995.
*10.2.5 -- Lease Agreement, dated June 1993, by and between Leo M. Rutten and
Alice J. Rutten and the Company.
</TABLE>
II-3
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT NO.
- --------------------
<C> <S>
*10.3.1 -- Revolving Loan and Security Agreement and Assignment of Leases, dated
October 13, 1995, by and between Shawmut Bank Connecticut, N.A., a
national banking association, and the Company, including Promissory
Note dated October 13, 1995 Limited Guaranty of Lewis Gould dated
October 13, 1995 and form of Guaranty executed by the Company's
subsidiaries.
11. -- Not applicable.
13. -- Not applicable.
14. -- Not applicable.
15. -- Not applicable.
16. -- Not applicable.
*21. -- List of Subsidiaries.
22. -- Not applicable.
+23.1 -- The consent of Berliner Zisser Walter & Gallegos, P.C., to the use of
its opinion with respect to the legality of the securities covered by
this Registration Statement and to the references to such firm in the
Prospectus filed as part of this Registration Statement is included
in Exhibit 5.
+23.2 -- Consent of Grant Thornton LLP, independent certified public
accountants for the Company.
*24. -- The Power of Attorney is included in the signature page of this
Registration Statement.
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Filed herewith.
* Previously filed.
- ---------------
(b) Consolidated Financial Statement Schedules.
Report of Independent Certified Public Accountants on Financial
Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS.
(a) Rule 415 Offering.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement.
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement.
II-4
<PAGE> 78
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
Provided, however, That paragraphs (a)(1)(i) and (a)(1)(ii) of this
section do not apply if the Registration Statement is on Form S-3, Form S-8
or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(f) Prompt Delivery.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates for Common
Stock in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(h) Indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act, and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(i) Rule 430A.
The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Registrant under Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared it effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement or Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boca Raton,
State of Florida on August 3, 1996.
Q.E.P. CO., INC.
By: /s/ LEWIS GOULD
------------------------------------
Lewis Gould, President
Each person whose signature appears below constitutes and appoints Lewis
Gould his attorney-in-fact, for him in any and all capacities, to sign any
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming that said attorney-in-fact,
or his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment has been signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ---------------
<C> <S> <C>
/s/ LEWIS GOULD President, Chief Executive August 3, 1996
- --------------------------------------------- Officer (Principal Executive
Lewis Gould Officer) and Director
/s/ PATRICK L. DAGGETT Chief Financial Officer August 3, 1996
- --------------------------------------------- (Principal Financial and
Patrick L. Daggett Accounting Officer) and
Director
/s/ EDWARD F. RONAN, JR. Director August 3, 1996
- ---------------------------------------------
Edward F. Ronan, Jr.
/s/ MERVYN D. FOGEL Director August 3, 1996
- ---------------------------------------------
Mervyn D. Fogel
/s/ SUSAN J. GOULD Director August 3, 1996
- ---------------------------------------------
Susan J. Gould
</TABLE>
II-6
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
+1.1 -- Form of Underwriting Agreement by and between Q.E.P. Co., Inc. (the
"Company") and Cruttenden Roth Incorporated (the "Representative")
+2.1 -- Form of Agreement and Plan of Merger regarding the change in domicile
of the Company from a New York corporation to a Delaware corporation.
*3.1.1 -- Form of Certificate of Incorporation of the Company as filed on
, 1996 with the Secretary of State of the State of
Delaware.
*3.2.1 -- Form of By-laws of the Company.
+3.3 -- Form of Indemnification Agreement to be executed by the officers and
directors of the Company and the Company.
+4.1 -- Form of specimen certificate for Common Stock of the Company.
+4.1.1 -- Form of Representative's Warrant to be issued by the Company to the
Representative.
+5. -- Opinion of Berliner Zisser Walter & Gallegos, P.C., regarding
legality of the securities covered by this Registration Statement.
+9. -- Voting Trust Agreement, dated August 3, 1996, by and between Lewis
Gould and Susan J. Gould.
+10.1 -- Employment Agreement, dated August 3, 1996, by and between Lewis
Gould and the Company.
+10.1.1 -- 1996 Stock Option Plan, effective June 20, 1996, authorizing 250,000
shares of Common Stock for issuance pursuant to the Plan.
*10.2.1 -- Lease Agreement, dated March 1, 1989, by and between Boca Commercial
Industrial Ltd. and the Company.
*10.2.2 -- Lease Agreement, dated November 1, 1992, by and between Miles Bros.
Construction and The Andrews Company.
*10.2.3 -- Lease Agreement, dated January 3, 1991, by and between
JMB/Pennsylvania Advisors and The O'Tool Company, Inc, including
Assignment of Lease dated June 9, 1994 by and between The O'Tool
Company, Inc. and the Company.
*10.2.4 -- Lease Agreement, dated December 1994, by and between Connecticut
Mutual Life Insurance Company and the Company, including amendments
thereto dated March 8, 1995 and November 21, 1995.
*10.2.5 -- Lease Agreement, dated June 1993, by and between Leo M. Rutten and
Alice J. Rutten and the Company.
*10.3.1 -- Revolving Loan and Security Agreement and Assignment of Leases, dated
October 13, 1995, by and between Shawmut Bank Connecticut, N.A., a
national banking association, and the Company, including Promissory
Note dated October 13, 1995 Limited Guaranty of Lewis Gould dated
October 13, 1995 and form of Guaranty executed by the Company's
subsidiaries.
11. -- Not applicable.
13. -- Not applicable.
14. -- Not applicable.
15. -- Not applicable.
16. -- Not applicable.
*21. -- List of Subsidiaries.
22. -- Not applicable.
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
+23.1 -- The consent of Berliner Zisser Walter & Gallegos, P.C., to the use of
its opinion with respect to the legality of the securities covered by
this Registration Statement and to the references to such firm in the
Prospectus filed as part of this Registration Statement is included
in Exhibit 5.
+23.2 -- Consent of Grant Thornton LLP, independent certified public
accountants for the Company.
*24. -- The Power of Attorney is included in the signature page of this
Registration Statement.
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Filed herewith.
* Previously filed.
<PAGE> 1
EXHIBIT 1.1
1,200,000 SHARES
Q.E.P. CO., INC.
COMMON STOCK
__________________
UNDERWRITING AGREEMENT
August __, 1996
Cruttenden Roth Incorporated
As the Representative of the Several Underwriters
Named in Schedule I Attached Hereto
18301 Von Karman, Suite 100
Irvine, California 92715-1099
Dear Sirs:
Q.E.P. Co., Inc., a Delaware corporation (the "Company"), proposes to
issue and sell an aggregate of 1,000,000 shares (the "Company Shares") of its
common stock, par value $.001 per share ("Common Stock"), and certain
stockholders of the Company (the "Selling Stockholders") propose to sell an
aggregate of 200,000 shares (the "Stockholder Shares") of Common Stock, each
Selling Stockholder selling the amount set forth opposite such Selling
Stockholder's name on Schedule II hereto, to Cruttenden Roth Incorporated (the
"Representative") and the several underwriters named in Schedule I hereto
(collectively with the Representative, the "Underwriters" and individually, an
"Underwriter," which terms shall also include any Underwriter substituted as
hereinafter provided in Section 12). The aforementioned 1,200,000 shares of
Common Stock to be issued and sold to the several Underwriters by the Company
and the Selling Stockholders are hereinafter referred to as the "Offered
Shares." The Company also proposes to sell to you individually, and not in
your capacity as representative of the several Underwriters, five-year warrants
(the "Representative's Warrants") to purchase up to 120,000 shares of Common
Stock of the Company (the "Representative's Warrant Stock"), which sale will be
consummated in accordance with the terms and conditions of the Representative's
Warrant Agreement (the "Representative's Warrant Agreement") filed as an
exhibit to the Registration Statement described below. The Offered Shares
shall be offered to the public at an offering price of $____ per Offered Share
(the "Offering Price").
In addition, the several Underwriters, in order to cover
over-allotments in the sale of the Offered Shares, may purchase from the
Company within 45 days after the Effective Date (as hereinafter defined), for
their own account for offering to the public at the Offering Price, up to
180,000 additional shares of Common Stock (the "Optional Shares"), upon the
terms and conditions set forth in Section 5 hereof. The Offered Shares and the
Optional Shares are
1
<PAGE> 2
hereinafter collectively referred to as the "Shares." The Company and the
Selling Stockholders, intending to be legally bound hereby, confirm this
agreement with each of the Underwriters as follows:
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to, and agrees with, the several Underwriters that:
(a) The Company has prepared in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"),
and the rules, regulations, releases and instructions (the
"Regulations") of the Securities and Exchange Commission (the "SEC")
under the Act in effect at all applicable times and has filed with the
SEC a registration statement on Form S-1 (File No. 333-7477) and one
or more amendments thereto registering the Shares under the Act. Any
preliminary prospectus included in such registration statement or
filed with the SEC pursuant to Rule 424(a) of the Regulations is
hereinafter called a "Preliminary Prospectus." The various parts of
such registration statement, including all exhibits thereto and the
information contained in any form of final prospectus filed with the
SEC pursuant to Rule 424(b) of the Regulations in accordance with
Section 6(a) of this Agreement and deemed by virtue of Rule 430A of
the Regulations to be part of such registration statement at the time
it was declared effective, each as amended at the time such
registration statement became effective, are hereinafter collectively
referred to as the "Registration Statement." The final prospectus in
the form included in the Registration Statement or first filed with
the SEC pursuant to Rule 424(b) of the Regulations and any amendments
or supplements thereto is hereinafter referred to as the "Prospectus."
(b) The Registration Statement has become effective under
the Act as of the Effective Date, and the SEC has not issued any stop
order suspending the effectiveness of the Registration Statement or
preventing or suspending the use of any Preliminary Prospectus nor has
the SEC instituted, threatened to institute or, to the Company's
knowledge, contemplated proceedings with respect to such an order.
The Company has not received any stop order suspending the sale of the
Shares in any jurisdiction designated by the Representative pursuant
to Section 6(f) hereof, and no proceedings for that purpose have been
instituted or to the Company's knowledge, are threatened or
contemplated. The Company has complied with any request of the SEC,
or any state securities commission in a state designated by the
Representative pursuant to Section 6(f) hereof, for additional
information to be included in the Registration Statement or Prospectus
or otherwise. Each Preliminary Prospectus conformed to the Act and
the Regulations as of its date and did not as of its date contain an
untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except the foregoing shall not apply to statements in or
omissions from any Preliminary Prospectus in reliance upon and in
conformity with information furnished to the Company in writing by or
on behalf of any Underwriter through the Representative expressly for
use therein. The Registration Statement on the date on which it was
declared effective by the SEC (the "Effective Date") conformed, and
any post-effective amendment thereof on the date it shall become
effective, and the Prospectus at the time it is filed with the SEC
pursuant to Rule 424(b) of the Regulations and on the Closing Date (as
defined in Section 4 hereof) and any Option Closing Date (as defined
in Section 5(b) hereof), will conform to the
2
<PAGE> 3
requirements of the Act and the Regulations, and neither the
Registration Statement, any post-effective amendment thereof nor the
Prospectus will, on any of such respective dates, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, except that this representation and warranty
does not apply to statements in or omissions from the Registration
Statement or the Prospectus made in reliance upon and in conformity
with information furnished to the Company in writing by or on behalf
of any Underwriter through the Representative expressly for use
therein. It is understood that the statements appearing in any
Preliminary Prospectus, the Prospectus or the Registration Statement
(A) on the inside front cover page with respect to stabilization, (B)
in the section entitled "Underwriting," and (C) in the section
entitled "Legal Matters" with respect to the identity of counsel for
the Underwriters constitute the only information furnished in writing
by or on behalf of any Underwriter for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement.
(c) The Company is a corporation duly organized, validly
existing and in good standing under the laws of Delaware, with all
necessary corporate power and authority, and all required licenses,
permits, certifications, registrations, approvals, consents and
franchises to own or lease and operate its properties and to conduct
its business as described in the Prospectus and to execute, deliver
and perform this Agreement. Each of the subsidiaries of the Company
(the "Subsidiaries") is a corporation duly organized and validly
existing in good standing under the laws of the jurisdiction of its
organization, with full corporate power and authority to own, lease,
and operate its properties and to conduct its business as described in
the Prospectus. The Company and each Subsidiary is duly qualified to
do business and is in good standing as a foreign corporation in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the Company.
(d) Except as disclosed in the Registration Statement,
the Company does not own any stock or other equity interest in, or
control, directly or indirectly, any corporation, partnership or other
entity.
(e) The Company has all necessary corporate power and
authority to execute, deliver and perform its obligations under this
Agreement and the Representative's Warrant Agreement.
(f) This Agreement and the Representative's Warrant
Agreement have been duly authorized, executed and delivered by the
Company and constitutes its valid and binding obligation, enforceable
against the Company in accordance with its terms, except as rights to
indemnity and contribution hereunder or thereunder may be limited by
federal or state securities laws or principles of public policy, and
except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles. This Agreement conforms to the description thereof in the
Prospectus.
3
<PAGE> 4
(g) The execution, delivery and performance of this
Agreement and the Representative's Warrant Agreement by the Company do
not and will not, with or without the giving of notice or the lapse of
time, or both, (A) conflict with any terms or provisions of the
Certificate of Incorporation or By-laws of the Company, as amended to
the date hereof and the Closing Date or Option Closing Date, as the
case may be; (B) result in a breach of, constitute a default under,
result in the termination or modification of or result in the creation
or imposition of any lien, security interest, charge or encumbrance
upon any of the properties of the Company pursuant to any indenture,
mortgage, deed of trust, contract, commitment or other agreement or
instrument to which the Company is a party or by which any of its
properties or assets are bound or affected, the effect of which would
have a material adverse effect on the business or properties of the
Company; (C) violate any law, rule, regulation, judgment, order or
decree of any government or governmental agency, instrumentality or
court, domestic or foreign, having jurisdiction over the Company or
any of its properties or businesses; or (D) result in a breach,
termination or lapse of the power and authority of the Company to own
or lease and operate its properties and conduct its business as
described in the Prospectus.
(h) The Company has authorized and outstanding capital
stock and, as of the date or dates indicated the Company had, the
capitalization set forth under the caption "Capitalization" in the
Prospectus and will have the as-adjusted capitalization set forth
under the caption "Capitalization" in the Prospectus on the Effective
Date. On the Effective Date, the Closing Date and any Option Closing
Date, there will be no options or warrants for the purchase of, other
outstanding rights to purchase, agreements or obligations to issue or
agreements or other rights to convert or exchange any obligation or
security into, capital stock of the Company or securities convertible
into or exchangeable for capital stock of the Company, except as
described in the Prospectus with respect to the outstanding options
that have been granted to employees, directors and others to purchase
150,000 shares of Common Stock (the "Employee Options") and the
Over-allotment Option (as hereinafter defined).
(i) The authorized capital stock of the Company,
including, without limitation, the outstanding Common Stock and the
Common Stock being issued on the Closing Date and Option Closing Date
(if any and to the extent applicable), conforms to the descriptions
thereof in the Prospectus, and such descriptions conform to the
descriptions thereof set forth in the instruments defining the same.
The information in the Prospectus insofar as it relates to the
Employee Options, the Warrants and other outstanding securities, in
each case as of the Effective Date, the Closing Date and any Option
Closing Date, is true, correct and complete in all material respects.
(j) The outstanding shares of Common Stock have been duly
authorized and are validly issued, fully paid and non-assessable. The
Employee Options have been duly authorized and validly issued and are
valid and binding obligations enforceable against the Company in
accordance with their terms, except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or
by general equitable principles. The shares of Common Stock issuable
pursuant to the Employee Options and the Warrants, when issued in
accordance with the respective terms thereof, will be duly authorized,
validly issued, fully paid and non-assessable. None of such
4
<PAGE> 5
outstanding shares of Common Stock or Employee Options were issued or
granted in violation of any preemptive rights of any security holder
of the Company. The Company has reserved a sufficient number of
shares of Common Stock for issuance pursuant to the Employee Options.
The holders of the outstanding shares of Common Stock are not, and
will not be, subject to personal liability solely by reason of being
such holders, and the holders of shares of Common Stock issuable
pursuant to the Employee Options will not be subject to personal
liability solely by reason of being such holders. The offers and
sales of the outstanding shares of Common Stock and the Employee
Options were, and the issuance of the shares of Common Stock pursuant
to the Employee Options will be, made in conformity with applicable
registration requirements or exemptions therefrom under federal and
applicable state securities laws.
(k) The issuance and sale of the Shares by the Company
have been duly authorized and, when the Shares have been duly
delivered against payment therefor as contemplated by this Agreement,
the Shares will be validly issued, fully paid and non-assessable, and
the holders thereof will not be subject to personal liability solely
by reason of being such holders. None of the Shares will be issued in
violation of any preemptive rights of any stockholder of the Company.
The certificates representing the Shares are in proper legal form
under, and conform to the requirements of, applicable Delaware law.
Neither the filing of the Registration Statement nor the offering or
sale of the Shares or the Representative's Warrant Stock as
contemplated by this Agreement and the Representative's Warrant
Agreement, respectively, gives any security holder of the Company any
rights, other than those which have been waived by passage of time
following due notice, for or relating to the registration of any
shares of Common Stock or other security of the Company.
(l) No consent, approval, authorization, order,
registration, license or permit of any court, government, governmental
agency, instrumentality or other regulatory body or official is
required for the valid authorization, issuance, sale and delivery by
the Company of any of the Shares, or for the execution, delivery or
performance by the Company of this Agreement and the Representative's
Warrant Agreement, except such as may be required for the registration
of the Shares under the Act, the Regulations and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which consent,
approval and authorization have been obtained, and for compliance with
the applicable state securities or Blue Sky laws, or the By-laws,
rules and other pronouncements of the National Association of
Securities Dealers, Inc. (the "NASD") and the approval of the Nasdaq
National Market (the "NMS"). Upon the effectiveness of the
Registration Statement, the Shares will be registered pursuant to
Section 12(g) of the Exchange Act, and will be included on the NMS.
The Company has taken no action designed, or likely, to have the
effect of terminating the registration of the Shares under Section
12(g) of the Exchange Act or the inclusion of the Shares on the NMS,
nor has the Company received any notification that the SEC or the NMS
is contemplating terminating such registration or inclusion.
(m) The statements in the Registration Statement and
Prospectus, insofar as they are descriptions of or references to
contracts, agreements or other documents, are accurate in all material
respects and present or summarize fairly, the information required to
be disclosed under the Act and the Regulations, and there are no
contracts,
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<PAGE> 6
agreements or other documents required to be described or referred to
in the Registration Statement or Prospectus or to be filed or
incorporated by reference as exhibits to the Registration Statement
under the Act or the Regulations that have not been so described,
referred to, filed or incorporated by reference, as required.
(n) The financial statements (including the notes
thereto) filed as part of any Preliminary Prospectus, the Prospectus
and the Registration Statement present fairly the financial position
of the Company, as of the respective dates thereof, and the results of
operations and cash flows of the Company, for the periods indicated
therein, all in conformity with generally accepted accounting
principles consistently applied, except as may be otherwise stated
therein. The financial information included in the Prospectus under
the captions "Prospectus Summary" and "Selected Financial Data"
presents fairly the information shown therein and has been compiled on
a basis consistent with that of the audited financial statements
included in the Registration Statement.
(o) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, there has not been (A) any material adverse
change (including, whether or not insured against, any material loss
or damage to any assets), or development involving a prospective
material adverse change, in the general affairs, properties, assets,
management, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company, (B) any
transaction entered into by the Company that is material to the
Company, (C) any dividend or distribution of any kind declared, paid
or made by the Company on its capital stock, (D) any liabilities or
obligations, direct or indirect, incurred by the Company that are
material to the Company except in the ordinary course of business, or
(E) any material change in the short-term debt or long-term debt of
the Company. The Company does not have any known (after due
investigation and inquiry) contingent liabilities or obligations that
are material and that are not disclosed in the Prospectus.
(p) The Company has not distributed and, prior to the
later to occur of the Closing Date, the Option Closing Date or the
completion of the distribution of the Shares, will not distribute any
offering material in connection with the offering or sale of the
Shares other than the Registration Statement, the Preliminary
Prospectus, the Prospectus and a blue sky survey, in any such case
only as permitted by the Act and the Regulations.
(q) The Company has filed with the appropriate federal,
state and local governmental agencies, and all foreign countries and
political subdivisions thereof, all tax returns that are required to
be filed, or has duly obtained extensions of time for the filing
thereof and has paid all taxes shown on such returns and all
assessments received by it to the extent that the same have become
due. The Company has not executed or filed with any taxing authority,
foreign or domestic, any agreement extending the period for assessment
or collection of any income taxes, is not a party to any known (after
due investigation and inquiry) pending action or proceeding by any
foreign or domestic governmental agencies for the assessment or
collection of taxes, and no claims for assessment or collection of
taxes have been asserted against the Company that might materially
adversely affect the general affairs, properties, assets,
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<PAGE> 7
condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company.
(r) Grant Thornton LLP, which is certifying the financial
statements included in the Prospectus and forming a part of the
Registration Statement, is a firm of independent public accountants as
required by the Act and the Regulations and is a member of the SEC
Practice Section.
(s) The Company is not in violation of, or in default
under, any of the terms or provisions, of (A) its Certificate of
Incorporation or Bylaws, each as amended to the date hereof, the
Closing Date or the Option Closing Date, as the case may be, (B) any
indenture, mortgage, deed of trust, contract, loan or credit
agreement, commitment or other agreement or instrument to which the
Company is a party or by which it or any of its properties are bound
or affected, (C) any law, rule, regulation, judgment, order or decree
known (after due investigation and inquiry) to the Company of any
government or governmental agency, instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any of its
properties or businesses or (D) any license, permit, certification,
registration, approval, consent or franchise referred to in
subsections (b) or (c) of this Section 1, except where such violation
or default would not have a material adverse effect on the business or
properties of the Company.
(t) Except as disclosed in the Registration Statement,
there are no claims, actions, suits, proceedings, arbitrations
investigations, or inquiries pending before, or to the Company's
knowledge, threatened or contemplated by, any governmental agency,
instrumentality, court or tribunal, domestic or foreign, or before any
private arbitrational tribunal, relating to or affecting the Company
or its properties or businesses that (A) might affect the issuance or
validity of any of the Shares or the validity of any of the
outstanding shares of Common Stock, or (B) if determined adversely to
the Company, would, in any case or in the aggregate, result in any
material adverse change in the general affairs, properties, assets,
condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects, of the Company, or (C)
are required to be described in the Registration Statement or the
Prospectus but are not described as required; nor, to the Company's
knowledge, is there any reasonable basis for any such claim, action,
suit, proceeding, arbitration, investigation or inquiry. There are no
outstanding orders, judgments or decrees of any court, governmental
agency, instrumentality or other tribunal known (after due
investigation and inquiry) to the Company enjoining the Company from,
or requiring the Company to take or refrain from taking any action, or
to which the Company, or any of its properties, assets or businesses
is bound or subject.
(u) Except as otherwise stated in the Prospectus, the
Company owns, or possesses adequate rights to use all patents, patent
applications, trademarks, trademark registrations, applications for
trademark registration, trade names, service marks, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential technology,
information, systems, design methodologies and devices or procedures
developed or derived from the Company's businesses), trade secrets,
confidential information, processes and formulations necessary for,
used in or proposed to be used in the conduct of its business as
described in the Prospectus (collectively, the "Intellectual
Property") that,
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<PAGE> 8
if not so owned or possessed, would materially adversely affect the
general affairs, properties, condition (financial or otherwise),
results of operations, stockholders' equity, business or prospects of
the Company. The Company has not infringed, is not infringing or has
not received any notice of conflict with the asserted rights of others
with respect to the Intellectual Property, and no others have
infringed upon or are in conflict with the Intellectual Property.
(v) The Company has obtained all permits, licenses and
other authorizations that are required, to the extent required, under
all environmental laws, including but not limited to the Federal Water
Pollution Control Act (33 U.S.C. Section 1251 et seq.), Resource
Conservation & Recovery Act (42 U.S.C. Section 6901 et seq.), Safe
Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C. Section Section
201, 300f), Toxic Substances Control Act (15 U.S.C. Section 2601 et
seq.), Clean Air Act (42 U.S.C. Section 7401 et seq.), Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C.
Section 9601 et seq.), other appropriate laws of jurisdictions in
which the Company's products have been used or located and any other
laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals or industrial, toxic
or hazardous substances or wastes into the environment (including,
without limitation, ambient air, surface water, ground water or land),
or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, chemicals or industrial, toxic or hazardous
substances or wastes under any regulation, code, plan, order, decree,
judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder (collectively, the "Environmental
Laws"), other than any permits, licenses or other authorizations
which, if not obtained, would not have a material adverse effect on
the business or properties of the Company. The Company is in
compliance in all material respects with all terms and conditions of
any required permits, licenses and authorizations, and is in
compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules, and
timetables contained in the Environmental Laws.
(w) There are no present or, to the Company's knowledge
(after due investigation and inquiry), past events, conditions,
circumstances, activities, practices, incidents, actions or plans
relating to the business as presently being conducted by the Company
that interfere with or prevent compliance with or continued compliance
with the Environmental Laws, the non-compliance with which would have
a material adverse effect on the Company, or which would be reasonably
likely to give rise to any material legal liability (whether statutory
or common law) or otherwise would be reasonably likely to form the
basis of any material claim, action, demand, suit, proceeding,
hearing, notice of violation, study, investigation, remediation, or
clean up based on or related to the generation, manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling, or the emission, discharge, release into the workplace,
community or environment of any pollutant, contaminant, chemical or
industrial, toxic, or hazardous substance or waste.
(x) The Company has good and marketable title to all
personal property (tangible and intangible) described in the
Prospectus as being owned by it, free and clear of all liens, security
interests, charges or encumbrances, except such as are described in
the Prospectus or which are not material to the business of the
Company.
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The Company has adequately insured the personal property of the
Company against loss or damage by fire or other casualty and
maintains, in adequate amounts, insurance against such other risks as
management of the Company deems appropriate. Except as described in
the Prospectus, the Company does not own any real property, and all
real property used or leased by the Company, as described in the
Prospectus (the "Premises"), is held by the Company under a valid,
subsisting and enforceable lease, except as enforcement may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights
generally or by general equitable principles. The Premises, and all
operations conducted thereon, are now and, since the Company began to
use such Premises, always have been, to the Company's knowledge (after
due investigation and inquiry), in compliance with the Environmental
Laws. Except as described in the Prospectus, the Company has no
knowledge (after due investigation and inquiry) of any use of the
Premises prior to when the Company began using the Premises that
constituted a violation of any Environmental Laws. There is no, and
the Company has not received notice of any, claim, demand,
investigation, regulatory action, suit or other action instituted or
threatened against the Company or the Premises relating to any of the
Environmental Laws. The Company has not received any notice of
material violation, citation, complaint, order, directive, request for
information or response thereto, notice letter, demand letter or
compliance schedule to or from any governmental or regulatory agency
arising out of or in connection with hazardous substances (as defined
by applicable Environmental Laws) on, about, beneath, arising from or
generated at the Premises.
(y) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or
specific authorization, (B) transactions are recorded as necessary in
order to permit preparation of financial statements in accordance with
generally accepted accounting principles and to maintain
accountability for assets, (C) access to assets is permitted only in
accordance with management's general or specific authorization and (D)
the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) No unregistered securities of the Company have been
sold by the Company or on behalf of the Company by any person or
persons controlling, controlled by or under common control with the
Company within the three years prior to the date hereof, except as
disclosed in the Registration Statement.
(aa) Each contract or other instrument (however
characterized or described) to which the Company is a party or by
which any of the properties or business of it is bound or affected and
to which reference has been made in the Prospectus or which has been
filed as an exhibit to the Registration Statement has been duly and
validly executed by the Company, and to the Company's best knowledge
(after due investigation and inquiry) by the other parties thereto.
Except as described in the Prospectus, each such contract or other
instrument is in full force and effect and is enforceable against the
parties thereto in accordance with its terms, and except as
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or
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by general equitable principles, and neither the Company, nor any
other party is in default thereunder and no event has occurred that,
with the lapse of time or the giving of notice, or both, would
constitute a default thereunder.
(bb) Except for the Company's 401(k), disability,
supplemental executive retirement plan, health and life insurance
plans, if any, the Company has not had any employee benefit plan,
profit sharing plan, employee pension benefit plan or employee welfare
benefit plan or deferred compensation arrangements (collectively,
"Plans") that are subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, or the rules and regulations
thereunder ("ERISA"). To the Company's knowledge, all Plans that are
subject to ERISA are, and have been at all times since their
establishment, in compliance with ERISA and, to the extent required by
the Internal Revenue Code of 1986, as amended (the "Code"), in
compliance with the Code. To the Company's knowledge, the Company has
not had any employee pension benefit plan that is subject to Part 3 of
Subtitle B of Title 1 of ERISA or any defined benefit plan or
multi-employer plan. To the Company's knowledge, the Company has not
maintained retiree life and retiree health insurance plans that are
employee welfare benefit plans providing for continuing benefit or
coverage for any employee or any beneficiary of any employee after
such employee's termination for employment, except as required by
Section 4980B of the Code. To the Company's knowledge, no fiduciary
or other party in interest with respect to any of the Plans has caused
any of such Plans to engage in a "prohibited action" as defined in
Section 406 of ERISA. As used in this subsection, the terms "defined
benefit plan," "employee benefit plan," "employee pension benefit
plan," "employee welfare benefit plan," "fiduciary" and
"multi-employer plan" shall have the respective meanings assigned to
such terms in Section 3 of ERISA.
(cc) No labor dispute exists with the employees of the
Company and to the Company's knowledge, no such labor dispute is
imminent. There is no existing or, to the Company's knowledge,
imminent labor disturbance by the employees of any of the Company's
principal suppliers, contractors or customers.
(dd) The Company has not incurred any liability for any
finder's fees or similar payments in connection with the transactions
contemplated herein.
(ee) Except as described in the Prospectus or as otherwise
disclosed to the Underwriters, the Company is not a party to, and is
not bound by, any agreement pursuant to which any material royalties,
honoraria or fees are payable by the Company to any person by reason
of the ownership or use of any Intellectual Property.
(ff) Except as disclosed in the Prospectus, there are no
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-K.
(gg) The Company is familiar with the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in
the future to continue to conduct, its affairs in such a manner to
ensure that it will not become an "investment company" within the
meaning of the 1940 Act and such rules and regulations.
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(hh) Neither the Company nor any director, officer, agent,
employee or other person associated with or acting on behalf of the
Company has, directly or indirectly, (A) used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful
expenses relating to any political activity, (B) made any unlawful
payment to foreign or domestic governments or governmental officials
or employees or to foreign or domestic political parties or campaigns
from corporate funds, (C) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended or (D) made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment.
Any certificate signed by any officer of the Company in such capacity
and delivered to the Representative or to counsel for the Underwriters pursuant
to this Agreement shall be deemed a representation and warranty by the Company
to the several Underwriters as to the matters covered thereby.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.
Each Selling Stockholder severally represents and warrants to, and agrees with,
the Company and the Underwriters that:
(a) Such Selling Stockholder has, and at the Closing Date will
have, valid marketable title to the Stockholder Shares proposed to be sold by
such Selling Stockholder hereunder on such date and full right, power and
authority to enter into this Agreement and to sell, assign, transfer and
deliver such Stockholder Shares hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, equities, claims and community property
rights; and upon delivery of and payment for such Stockholder Shares hereunder,
the Underwriters will acquire valid marketable title thereto, free and clear of
all voting trust arrangements, liens, encumbrances, equities, claims and
community property rights.
(b) Such Selling Stockholder, (i) has no reason to believe that
the representations and warranties of the Company contained in Section 1 are
not true and correct, (ii) is familiar with the Registration Statement and
(iii) has no knowledge of any material fact, condition or information not
disclosed in the Prospectus or any supplement thereto which has adversely
affected or may adversely affect the business of the Company; and the sale of
Stockholder Shares by such Selling Stockholder pursuant hereto is not prompted
by any information concerning the Company which is not set forth in the
Prospectus or any supplement thereto.
(c) There is no action, suit, investigation or proceeding before
or by any government, governmental instrumentality or court, domestic or
foreign, or otherwise now pending or, to the knowledge of such Selling
Stockholder, threatened to which such Selling Stockholder is or would be a
party or of which the property of such Selling Stockholder is or may be
subject, that (i) seeks to restrain, enjoin, prevent the consummation of or
otherwise challenge the sale of Stockholder Shares by such Selling Stockholder
or any of the other transactions contemplated hereby, or (ii) questions the
legality or validity of any such transactions or seeks to recover damages or
obtain other relief in connection with any such transactions.
(d) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution and delivery by such
Selling Stockholder of the Custody Agreement (as defined below) or the
Power-of-Attorney (as defined below), the execution and delivery by or on
behalf of such Selling Stockholder of this Agreement and the
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<PAGE> 12
consummation by such Selling Stockholder of the transactions contemplated
herein, including the valid sale and delivery of the Stockholder Shares, except
such as may have been obtained under the Securities Act and such as may be
required under the "Blue Sky" laws of any jurisdiction in connection with the
purchase and distribution of the Common Stock by the Underwriters and such
other approvals as have been obtained.
(e) Neither the sale of the Stockholder Shares being sold by such
Selling Stockholder nor the consummation of any other of the transactions
herein contemplated by such Selling Stockholder or the fulfillment of the terms
hereof by such Selling Stockholder will conflict with, result in a breach of,
or constitute a default under the terms of any contract, indenture, mortgage,
deed of trust, loan or credit agreement, bond, debenture, note, lease or other
agreement or instrument to which such Selling Stockholder is a party or bound,
or any decree, judgment, order or regulation applicable to such Selling
Stockholder or its properties of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over such Selling
Stockholder or its properties.
(f) No such Selling Stockholder nor any of his or her affiliates
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, or has any other association
with (within the meaning of Article I, Section 1(m) of the Bylaws of the NASD),
any member firm of the NASD.
(g) Such Selling Stockholder has not relied upon any
representation by the Underwriters with respect to any tax consequences
(federal, state or local) of the transactions contemplated hereby, or
otherwise. Such Selling Stockholder acknowledges that any tax liability that
might arise with respect to the Stockholder Shares to be sold by such Selling
Stockholder shall be solely the responsibility of such Selling Stockholder.
(h) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which might be reasonably
expected to cause or result, under the Exchange Act (as hereinafter defined) or
otherwise, in stabilization or manipulation of the price of the Shares or other
shares of Common Stock to facilitate the sale or resale of the Shares or other
shares of Common Stock.
(i) Such Selling Stockholder has executed and delivered a Selling
Stockholders' Power of Attorney ("Power of Attorney") between the Selling
Stockholder and Lewis Gould (the "Agent"), naming the Agent as such Selling
Stockholder's attorney-in-fact and, by the execution by the Agent of this
Agreement, the Agent hereby represents and warrants that he has been duly
appointed as Attorney-in-Fact by each Selling Stockholder pursuant to the Power
of Attorney for the purpose of entering into and carrying out this Agreement,
and the Power of Attorney has been duly executed by such Selling Stockholder
and a copy thereof has been delivered to you.
(j) Such Selling Stockholder has deposited in custody with the
custodian, pursuant to a Letter of Transmittal and Custody Agreement ("Custody
Agreement") with Berliner, Zisser, Walter & Gallegos, P.C. (the "Custodian"),
certificates in negotiable form for the Stockholder Shares to be sold hereunder
by such Selling Stockholder, for the purpose of further delivery pursuant to
this Agreement. Such Selling Stockholder agrees that the Stockholder Shares to
be sold by such Selling Stockholder on deposit with the Custodian are subject
to the interests of the Company, the Underwriters and the other Selling
Stockholders,
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<PAGE> 13
that the arrangements made for such deposit are to that extent irrevocable, and
that the obligations of such Selling Stockholder hereunder shall not be
terminated except as provided in this Agreement or in the Custody Agreement by
any act of such Selling Stockholder, by operation of law, whether, in the case
of an individual Selling Stockholder, by the death or incapacity of such
Selling Stockholder or, in the case of a trust or estate, by the death of the
trustee or trustees or the executor or executors or the termination of such
trust or estate, or, in the case of a partnership or corporation, by the
dissolution, winding-up or other event affecting the legal existence of such
entity, or by the occurrence of any other event. If any individual Selling
Stockholder, trustee or executor should die or become incapacitated, if any
such trust, estate, partnership or corporation should be terminated, or if any
other event should occur before the delivery of the Stockholder Shares to be
sold by such Selling Stockholder hereunder, the documents evidencing such
Stockholder Shares then on deposit with the Custodian shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement and of
the Custody Agreement as if such death, incapacity, termination or other event
had not occurred, regardless of whether or not the Custodian shall have
received notice thereof. Each Agent has been duly authorized by such Selling
Stockholder to execute and deliver this Agreement and the Custodian has been
authorized to receive and acknowledge receipt of the proceeds of sale of the
Stockholder Shares to be sold by such Selling Stockholder against delivery
thereof and otherwise act on behalf of such Selling Stockholder.
(k) Each Preliminary Prospectus as of its date has conformed in
all material respects with the requirements of the Act and, as of this date,
has not included any untrue statement of material fact or omitted to state a
material fact necessary to make the statements therein not misleading; and when
the Registration Statement became effective, and at all times subsequent
thereto, up to the Closing Date, (1) the Registration Statement and the
Prospectus and any amendments or supplements thereto will contain all
statements that are required to be stated therein in accordance with the Act
and the Regulations and will in all material respects conform to the
requirements of the Act and the Regulations, and (2) neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, will
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading.
(l) Such Selling Stockholder will not sell, contract to sell or
otherwise dispose of any Common Stock for a period of nine months after this
Agreement becomes effective without the prior written consent of the Company
and the Representative.
(m) Except as disclosed in the Prospectus, such Selling
Stockholder is not a party to any formal or informal voting agreements,
understandings or arrangements with respect to the voting of the Common Stock.
3. PURCHASE AND SALE OF OFFERED SHARES. On the basis of the
representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company and the
Selling Stockholders shall sell the Offered Shares to the several Underwriters
at the Offering Price less the underwriting discount shown on the cover page of
the Prospectus (the "Underwriting Discount"), and the Underwriters, severally
and not jointly, shall purchase from the Company and the Selling Stockholders,
on a firm commitment basis, at the Offering Price less the Underwriting
Discount, the respective Offered Shares set forth opposite their names on
Schedule I hereto. In making this
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Agreement, each Underwriter is contracting severally, and not jointly, and,
except as provided in Sections 5 and 12 hereof, the agreement of each
Underwriter is to purchase only that number of Offered Shares specified with
respect to that Underwriter in Schedule I hereto. The Underwriters shall offer
the Offered Shares to the public as set forth in the Prospectus.
4. PAYMENT AND DELIVERY. Payment for the Offered Shares shall be
made to the Company and the Selling Stockholders, as appropriate, by certified
or official bank check payable to the order of the Company in Los Angeles
Clearing House funds (next day funds), at the offices of Berliner Zisser Walter
& Gallegos, P.C., One Norwest Center, 1700 Lincoln Street, Suite 4700, Denver,
Colorado 80203-4547, or at such other location as shall be agreed upon by the
Company and the Representative, or in immediately available funds wired to such
account or accounts as the Company may specify (with all costs and expenses
incurred by the Underwriters in connection with such settlement in immediately
available funds (including, but not limited to, interest or cost of funds
expenses) to be borne by the Company), against delivery of the Offered Shares
to the Representative at the offices of Cruttenden Roth Incorporated, 18301 Von
Karman, Suite 100, Irvine, California 92715-1009 for the respective accounts of
the Underwriters. Such payments and delivery will be made at 10:00 A.M.,
California time, on the third business day after the date of this Agreement or
at such other time and date not later than three business days thereafter as
the Representative and the Company shall agree upon. Such time and date are
referred to herein as the "Closing Date." The certificates representing the
Offered Shares to be sold and delivered will be in such denominations and
registered in such names as the Representative requests not less than one full
business day prior to the Closing Date, and will be made available to the
Representative for inspection, checking and packaging at the office of the
Company's Transfer Agent, not less than one full business day prior to the
Closing Date.
5. OPTION TO PURCHASE OPTIONAL SHARES.
(a) For the purposes of covering any over-allotments in
connection with the distribution and sale of the Offered Shares as
contemplated by the Prospectus, subject to the terms and conditions
herein set forth, the several Underwriters are hereby granted an
option by the Company to purchase all or any part of the Optional
Shares from the Company (the "Over-allotment Option"). The purchase
price per share to be paid for the Optional Shares shall be the
Offering Price less the Underwriting Discount. The Over-allotment
Option granted hereby may be exercised by the Representative on behalf
of the several Underwriters as to all or any part of the Optional
Shares at any time (but not more than once) within 45 days after the
Effective Date. No Underwriter shall be under any obligation to
purchase any Optional Shares prior to an exercise of the
Over-allotment Option.
(b) The Over-allotment Option granted hereby may be
exercised by the Representative on behalf of the several Underwriters
by giving notice to the Company by a letter sent by registered or
certified mail, postage prepaid, telex, telegraph, telegram or
facsimile (such notice to be effective when sent), addressed as
provided in Section 14 hereof, setting forth the number of Optional
Shares to be purchased, the date and time for delivery of and payment
for the Optional Shares and stating that the Optional Shares referred
to therein are to be used for the purpose of covering over-allotments
in connection with the distribution and sale of the Offered Shares.
If such notice is given prior to the Closing Date, the date set forth
therein for such delivery and
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payment shall not be earlier than either three full business days
thereafter or the Closing Date, whichever occurs later. If such
notice is given on or after the Closing Date, the date set forth
therein for such delivery and payment shall be a date selected by the
Representative that is not later than three full business days after
the exercise of the Over- allotment Option. The date and time set
forth in such a notice is referred to herein as the "Option Closing
Date," and a closing held pursuant to such a notice is referred to
herein as the "Option Closing." The number of Optional Shares to be
sold to each Underwriter pursuant to the exercise of the
Over-allotment Option shall be the number that bears the same ratio to
the aggregate number of Optional Shares being purchased through such
Over-allotment Option exercise as the number of Offered Shares
opposite the name of such Underwriter in Schedule I hereto bears to
the total number of all Offered Shares; subject, however, to such
adjustment as the Representative may approve to eliminate fractional
shares and subject to the provisions for the allocation of Optional
Shares purchased for the purpose of covering over-allotments set forth
in the Agreement Among Underwriters. Upon the exercise of the
Over-allotment Option, the Company shall become obligated and sell to
the Representative for the respective accounts of the Underwriters,
and on the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions
herein set forth, and the several Underwriters shall become severally,
but not jointly, obligated to purchase from the Company, the number of
Optional Shares specified in each notice of exercise of the
Over-allotment Option.
(c) Payment for the Optional Shares shall be made to the
Company by certified or official bank check payable to the order of
the Company in Los Angeles Clearing House funds (next day funds), at
the office of Berliner Zisser Walter & Gallegos, One Norwest Center,
1700 Lincoln Street, Denver, Colorado 80203-4547 or such other
location as shall be agreed upon by the Company and the
Representative, or in immediately available funds wired to such
account as the Company may specify (with all costs and expenses
incurred by the Underwriters in connection with such settlement in
immediately available funds (including, but not limited to, interest
or cost of funds expenses) to be borne by the Company), against
delivery of the Optional Shares to the Representative at the offices
of Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine,
California 92715, for the respective accounts of the Underwriters.
The certificates representing the Optional Shares to be issued and
delivered will be in such denominations and registered in such names
as the Representative requests not less than one full business day
prior to the Option Closing Date, and will be made available to the
Representative for inspection, checking and packaging at the office of
the Company's Transfer Agent not less than one full business day prior
to the Option Closing Date.
6. CERTAIN COVENANTS AND AGREEMENTS OF THE COMPANY. The Company
covenants and agrees with the several Underwriters as follows:
(a) If Rule 430A of the Regulations is employed, the
Company will timely file the Prospectus pursuant to and in compliance
with Rule 424(b) of the Regulations and will advise the Representative
of the time and manner of such filing.
(b) The Company will not at any time, whether before or
after the Registration Statement shall have become effective, during
such period as, in the
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<PAGE> 16
opinion of counsel for the Underwriters, the Prospectus is required by
law to be delivered in connection with sales by the Underwriters or a
dealer, file or publish any amendment or supplement to the
Registration Statement or Prospectus of which the Representative has
not been previously advised and furnished a copy, or which is not in
compliance with the Regulations, or, during the period before the
distribution of the Offered Shares and the Optional Shares is
completed, file or publish any amendment or supplement to the
Registration Statement or Prospectus to which the Representative
reasonably objects in writing.
(c) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to
become effective and will advise the Representative immediately, and
confirm such advice in writing, (i) when the Registration Statement,
or any post-effective amendment to the Registration Statement, is
filed with the SEC, (ii) of the receipt of any comments from the SEC,
(iii) when the Registration Statement has become effective and when
any post-effective amendment thereto becomes effective, or when any
supplement to the Prospectus or any amended Prospectus has been filed,
(iv) of any request of the SEC for amendment or supplementation of the
Registration Statement or Prospectus or for additional information,
(v) during the period when the Prospectus is required to be delivered
under the Act and Regulations, of the happening of any event which in
the Company's judgment makes any material statement in the
Registration Statement or the Prospectus untrue or which requires any
changes to be made in the Registration Statement or Prospectus in
order to make any material statements therein not misleading and (vi)
of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any Preliminary Prospectus or the Prospectus,
the suspension of the qualification of any of the Shares for offering
or sale in any jurisdiction in which the Underwriters intend to make
such offers or sales, or of the initiation or threatening of any
proceedings for any such purposes. The Company will use its best
efforts to prevent the issuance of any such stop order or of any order
preventing or suspending such use and, if any such order is issued, to
obtain as soon as possible the lifting thereof.
(d) The Company has delivered to the Representative,
without charge, and will continue to deliver from time to time until
the Effective Date, as many copies of each Preliminary Prospectus as
the Representative may reasonably request. The Company will deliver
to the Representative, without charge, as soon as possible after the
Effective Date, and thereafter from time to time during the period
when delivery of the Prospectus is required under the Act, such number
of copies of the Prospectus (as supplemented or amended, if the
Company makes any supplements or amendments to the Prospectus) as the
Representative may reasonably request. The Company hereby consents to
the use of such copies of each Preliminary Prospectus and the
Prospectus for purposes permitted by the Act, the Regulations and the
securities or Blue Sky laws of the jurisdictions in which the Shares
are offered or sold by the several Underwriters and by all dealers to
whom Shares may be offered or sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter
as the Prospectus is required by the Act to be delivered in connection
with sales by any Underwriter or dealer. The Company has furnished or
will furnish to the Representative two signed copies of the
Registration Statement as originally filed and of all amendments
thereto,
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<PAGE> 17
whether filed before or after the Effective Date, two copies of all
exhibits filed therewith and two signed copies of all consents and
certificates of experts, and will deliver to the Representative such
number of conformed copies of the Registration Statement, including
financial statements and exhibits, and all amendments thereto, as the
Representative may reasonably request.
(e) The Company will comply with the Act, the
Regulations, the Exchange Act and the rules and regulations thereunder
so as to permit the continuance of offers and sales of, and dealings
in, the Shares for as long as may be necessary to complete the
distribution of the Shares as contemplated hereby.
(f) The Company will furnish such information as may be
required and otherwise cooperate in the registration or qualification
of the Shares, or exemption therefrom, for offering and sale by the
several Underwriters and by dealers under the securities or Blue Sky
laws of such jurisdictions in which the Representative determines to
offer the Shares, after consultation with the Company, and will file
such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification;
provided, however, that no such qualification shall be required in any
jurisdiction where, solely as a result thereof, the Company would be
subject to taxation or qualification as a foreign corporation doing
business in such jurisdiction where it is not now so qualified or to
take any action which would subject it to service of process in suits,
other than those arising out of the offering or sale of the Shares, in
any jurisdiction where it is not now so subject. The Company will,
from time to time, prepare and file such statements and reports as are
or may be required to continue such qualification in effect for so
long a period as is required under the laws of such jurisdiction for
such offering and sale.
(g) Subject to subsection (b) of this Section 6, in case
of any event, at any time within the period during which, in the
opinion of counsel for the Underwriters, a prospectus is required to
be delivered under the Act and Regulations, as a result of which event
any Preliminary Prospectus or the Prospectus, as then amended or
supplemented, would contain, in the judgment of the Company or in the
opinion of counsel for the Underwriters, an untrue statement of a
material fact, or omit to state any material fact necessary in order
to make the statements therein, in light of the circumstances under
which they were made, not misleading, or, if it is necessary at any
time to amend any Preliminary Prospectus or the Prospectus to comply
with the Act and Regulations or any applicable securities or Blue Sky
laws, the Company promptly will prepare and file with the SEC, and any
applicable state securities commission, an amendment or supplement
that will correct such statement or omission or an amendment that will
effect such compliance and will furnish to the Representative such
number of copies of such amendment or amendments or supplement or
supplements to such Preliminary Prospectus or the Prospectus (in form
and substance satisfactory to the Representative and counsel for
Underwriters) as the Representative may reasonably request. For
purposes of this subsection, the Company will furnish such information
to the Representative, the Underwriters' counsel and counsel for the
Company as shall be necessary to enable such persons to consult with
the Company with respect to the need to amend or supplement any
Preliminary Prospectus or the Prospectus, and shall furnish to the
Representative and the Underwriters' counsel such further information
as each may from time to time
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<PAGE> 18
reasonably request. If the Company and the Representative agree that
any Preliminary Prospectus or the Prospectus should be amended or
supplemented, the Company, if requested by the Representative, will,
if and to the extent required by law, promptly issue a press release
announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(h) The Company will make generally available to its
security holders as soon as practicable and in any event not later
than 45 days after the end of the period covered thereby, an earnings
statement of the Company (which need not be audited unless required by
the Act, the Regulations, the Exchange Act or the rules or regulations
thereunder) that shall comply with Section 11(a) of the Act and cover
a period of at least 12 consecutive months beginning not later than
the first day of the Company's fiscal quarter next following the
Effective Date.
(i) For a period of five years from the Effective Date,
the Company will deliver to the Representative upon request: (A) a
copy of each report or document, including, without limitation,
reports on Forms 8-K, 10-K and 10-Q (or such similar forms as may be
designated by the SEC and be applicable to the Company ), registration
statements and any exhibits thereto, filed with or furnished to the
SEC or any securities exchange or the NASD, as soon as practicable
after the date each such report or document is so filed or furnished,
(B) as soon as practicable, copies of any reports or communications
(financial or other) of the Company mailed to its security holders and
(C) every material press release in respect of the Company or its
affairs that was released or prepared by the Company.
(j) During the course of the distribution of the Shares,
the Company has not taken, nor will it take, directly or indirectly,
any action designed to or that might, in the future, reasonably be
expected to cause or result in stabilization or manipulation of the
price of the Common Shares.
(k) The Company will cause each person listed on Schedule
II hereto (except as otherwise noted on such Schedule) to execute a
legally binding and enforceable agreement (a "lockup agreement") to,
for a period of nine months from the Effective Date, not sell, offer
to sell, contract to sell, grant any option for the sale of or
otherwise transfer or dispose of any Common Shares (except for the
sale of the Shares as contemplated by this Agreement), any options to
purchase Common Shares or any securities convertible into or
exchangeable for Common Shares (excluding the issuance of Common
Shares pursuant to the Employee Options) without the prior written
consent of the Representative, which lockup agreement shall be in form
and substance satisfactory to the Representative and the Underwriters'
counsel, and deliver such lockup agreement to the Representative prior
to the Effective Date. Appropriate stop transfer instructions will be
issued by the Company to the transfer agent for the securities
affected by the lockup agreements.
(l) The Company will not sell, issue, contract to sell,
offer to sell or otherwise dispose of any Common Shares, options to
purchase Common Shares or any other security convertible into or
exchangeable for Common Shares, from the date of the Effective Date
through the period ending nine months after the Effective Date,
without the prior written consent of the Representative, except for
the sale of the
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<PAGE> 19
Shares as contemplated by this Agreement, the granting of options, and
the issuance of Common Shares upon their exercise, under the Company's
stock option plans described in the Prospectus and the issuance of
Common Shares pursuant to the Employee Options and the Warrants.
(m) The Company will use all reasonable efforts to
maintain the inclusion of the Common Shares on the NMS.
(n) The Company shall, at its sole cost and expense,
supply and deliver to the Representative and the Underwriters' counsel
(in the form they require), within a reasonable period after the
Closing Date, three transaction binders, each of which shall include
the Registration Statement, as amended or supplemented, all exhibits
to the Registration Statement, each Preliminary Prospectus, the
Prospectus, the Preliminary Blue Sky Memorandum and any supplement
thereto and all underwriting and other closing documents.
(o) The Company will use the net proceeds from the sale
of the Shares to be sold by it hereunder substantially in accordance
with the description thereof set forth in the Prospectus.
7. PAYMENT OF EXPENSES.
(a) Whether or not the transactions contemplated by this
Agreement are consummated and regardless of the reason this Agreement
is terminated, the Company will pay or cause to be paid, and bear or
cause to be borne, all costs and expenses incident to the performance
of the obligations of the Company under this Agreement, including:
(i) the fees and expenses of the accountants and counsel for the
Company incurred in the preparation of the Registration Statement and
any post-effective amendments thereto (including financial statements
and exhibits), each Preliminary Prospectus and the Prospectus and any
amendments or supplements thereto; (ii) printing and mailing expenses
associated with the Registration Statement and any post-effective
amendments thereto, each Preliminary Prospectus, the Prospectus
(including any supplement thereto), this Agreement, the Agreement
Among Underwriters, the Underwriters' Questionnaire, the Power of
Attorney, the Selected Dealer Agreement and related documents and the
Preliminary Blue Sky Memorandum and any supplement thereto; (iii) the
costs incident to the authentication, issuance, delivery and transfer
of the Shares to the Underwriters; (iv) all taxes, if any, on the
issuance, delivery and transfer of the Shares to be sold by the
Company; (v) the fees, expenses and all other costs of qualifying the
Shares for the sale under the securities or Blue Sky laws of those
jurisdictions in which the Shares are to be offered or sold; (vi) the
fees, expenses and other costs of, or incident to, securing any review
or approvals by or from the NASD exclusive of fees of the
Underwriters' counsel; (vii) the filing fees of the SEC; (viii) the
cost of furnishing to the Underwriters copies of the Registration
Statement, each Preliminary Prospectus and the Prospectus (including
any supplement or amendment thereto) as herein provided; (ix) the
Company's travel expenses in connection with meetings with the
brokerage community and institutional investors and expenses
associated with hosting such meetings, including meeting rooms, meals,
facilities and ground transportation expenses; (x) the costs and
expenses associated with settlement in same day funds (including, but
not limited to, interest or cost of
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<PAGE> 20
funds expenses), if desired by the Company; (xi) the fees for
inclusion of the Shares on the NMS; (xii) the cost of printing and
engraving certificates for the Shares; (xiii) the cost and charges of
any transfer agent; (xiv) the cost of preparing bound volumes of
documents relating to the transactions contemplated by this Agreement
for the Representative and its counsel; and (xv) all other costs and
expenses reasonably incident to the performance of its obligations
hereunder that are not otherwise specifically provided for in this
Section 7, provided that, except as specifically set forth below and
in subsection (c) of this Section 7, the Underwriters shall be
responsible for their out-of-pocket expenses, including their lodging
and travel expenses associated with meetings with the brokerage
community and institutional investors, and the fees and expenses of
their counsel. In addition, the Company shall pay to Cruttenden Roth
Incorporated, individually and not in its capacity as a
Representative, a non-accountable expense allowance of 2 1/2% of the
aggregate Offering Price of the Company Shares and the Optional
Shares, but only upon payment therefor by the several Underwriters.
If the sale of the Offered Shares provided for herein is not
consummated by reason of any failure, refusal or inability on the part
of the Company to perform any agreement on its part to be performed,
or because any other condition to the Underwriters' obligations
hereunder is not fulfilled, the Company shall pay for all reasonable
out-of-pocket accountable expenses (including fees and disbursements
of counsel) actually incurred by the Underwriters in connection with
the proposed sale of the Offered Shares. If this agreement is
terminated or if the sale of the Offered Shares provided for herein is
not consummated for any reason other than by reason of any failure,
refusal or inability on the part of the Company to perform any
agreement on its part to be performed or because any other condition
of the Underwriters' obligations hereunder is not fulfilled, the
Company shall pay the several Underwriters for all reasonable
out-of-pocket accountable expenses (including fees and disbursements
of counsel) actually incurred by the Underwriters in connection with
the proposed sale of the Offered Shares, up to a maximum of $100,000.
The Company shall not in any event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement. You acknowledge that $25,000 has already
been paid to you by the Company to be applied against such
non-accountable expense allowance or such reasonable out-of- pocket
accountable expenses if the sale of Offered Shares is not consummated
as provided in the preceding sentences, as the case may be. You agree
that any portion of such $25,000 that is not necessary to pay the
Underwriters for their reasonable out-of-pocket accountable expenses
actually incurred if the sale of Shares is not consummated for any
reason shall be returned to the Company.
(b) The Selling Stockholders shall pay to Cruttenden Roth
Incorporated, individually and not in its capacity as a
Representative, a non-accountable expense allowance of 2 1/2% of the
aggregate Offering Price of the Stockholder Shares, but only upon
payment therefor by the several Underwriters.
(c) The Company shall pay as due any registration,
qualification and filing fees and any accountable out-of- pocket
disbursements in connection with such registration, qualification or
filing in the jurisdictions in which the Representative determines,
after consultation with the Company, to offer or sell the Shares.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligation of
each Underwriter to purchase and pay for the Offered Shares that it has agreed
to purchase hereunder on the
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<PAGE> 21
Closing Date, and to purchase and pay for any Optional Shares as to which its
right to purchase under Section 5 has been exercised on an Option Closing Date,
is subject at the date hereof, the Closing Date and any Option Closing Date to
the continuing accuracy of the representations and warranties of the Company
and the Selling Stockholders set forth herein, to the performance by the
Company and the Selling Stockholders of their respective covenants, agreements
and obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become
effective not later than 5:30 P.M., Denver, Colorado time, on the date
of this Agreement, or at such later time or on such later date as the
Representative may agree to in writing; if required by the
Regulations, the Prospectus shall have been filed with the SEC
pursuant to Rule 424(b) of the Regulations within the applicable time
period prescribed for such filing by the Regulations and in accordance
with subsection (a) of Section 6 hereof; on or prior to the Closing
Date or any Option Closing Date, as the case may be, no stop order or
other order preventing or suspending the effectiveness of the
Registration Statement or the sale of any of the Shares shall have
been issued under the Act or any state securities law and no
proceedings for that purpose shall have been initiated or shall be
pending or, to the Representative's knowledge or the knowledge of the
Company, shall be contemplated by the SEC or any authority in any
jurisdiction designated by the Representative pursuant to subsection
(f) of Section 5 hereof and any request on the part of the SEC for
additional information shall have been complied with to the reasonable
satisfaction of counsel for the Underwriters.
(b) All corporate proceedings and other matters incident
to the authorization, form and validity of this Agreement and the
Shares and the form of the Registration Statement, each Preliminary
Prospectus and the Prospectus, and all amendments and supplements
thereto and all other legal matters relating to this Agreement and the
transactions contemplated hereby, shall be satisfactory in all
respects to counsel to the Underwriters; the Company shall have
furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters; and the
Representative shall have received from the Underwriters' counsel,
O'Melveny & Myers LLP, a favorable opinion, dated as of the Closing
Date and any Option Closing Date, as the case may be, and addressed to
the Representative individually and as the Representative of the
several Underwriters with respect to the due authorization, execution
and delivery of this Agreement, that the issuance and sale of the
Shares have been duly authorized by the Company, that when the Shares
have been duly delivered against payment therefor as contemplated by
this Agreement, they will be validly issued, fully paid and
non-assessable and that the Registration Statement has become
effective under the Act.
(c) The NASD shall have indicated that it has no
objection to the underwriting arrangements pertaining to the sale of
any of the Shares.
(d) The Representative shall have received copies of the
lockup agreements described in subsection (l) of Section 6 signed by
those persons set forth on Schedule II hereto.
(e) The Representative shall have received at or prior to
the Closing Date from the Company's counsel a memorandum or summary,
in form and substance
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<PAGE> 22
satisfactory to the Representative, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the
securities or Blue Sky laws of such jurisdictions designated by the
Representative pursuant to subsection (f) of Section 6 hereof.
(f) You shall have received on the Closing Date and on
the Option Closing Date, if any, the following opinions of Berliner
Zisser Walter & Gallegos, P.C., counsel for the Company and the
Selling Stockholders, dated the Closing Date and the Option Closing
Date, if any, and addressed to the Underwriters and with reproduced
copies or signed counterparts thereof for each of the Underwriters:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation;
(ii) The Company has the corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Registration
Statement and the Prospectus; and the Company is duly
qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or
leasing of properties or the conduct of its business requires
such qualification, except where the failure so to qualify
taken in the aggregate would not have a material adverse
effect on the business, operations or financial condition of
the Company, and, except as set forth in the Prospectus, the
Company does not own or control, directly or indirectly, any
corporation, association or other entity;
(iii) Each Subsidiary is a corporation duly
organized and validly existing in good standing under the laws
of the jurisdiction of its organization, with full corporate
power and authority to own, lease, and operate its properties
and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement
thereto); and all the outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable, and are owned by the
Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any perfected security
interest, or, to the best knowledge of such counsel after
reasonable inquiry, any other security interest, lien, adverse
claim, equity or other encumbrance;
(iv) The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" as of the dates stated
therein; the issued and outstanding shares of capital stock of
the Company have been duly and validly authorized and issued,
are fully paid and nonassessable, and to such counsel's
knowledge after reasonable inquiry, have not been issued in
violation of any preemptive right, or co-sale right,
registration right, right of first refusal or other similar
right;
(v) The Shares to be issued and sold by the
Company to the several Underwriters pursuant to the terms of
this Agreement will be, upon issuance and delivery against
payment therefor in accordance with the terms hereof, duly
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<PAGE> 23
authorized and validly issued and fully paid and
nonassessable; and the stockholders of the Company do not have
any preemptive rights, co-sale rights, rights of first refusal
or other similar rights, which rights have not previously been
waived, to purchase any of the Shares pursuant to the
Company's charter or bylaws, or to such counsel's knowledge
after reasonable inquiry, pursuant to any agreement to which
the Company is a party;
(vi) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and
deliver to the Underwriters the Shares to be issued, sold and
delivered by it hereunder;
(vii) This Agreement has been duly authorized by
all necessary corporate action on the part of the Company and
has been duly executed and delivered by the Company;
(viii) This Agreement when executed and delivered
shall have been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization,
execution and delivery by you, is the valid, legal and binding
agreement of the Company, enforceable against the Company in
accordance with its terms, except insofar as the
indemnification and contribution provisions may be limited by
applicable law and except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to or affecting creditor's rights generally or
by general equitable principles;
(ix) The Registration Statement and all
post-effective amendments, if any, have become effective under
the Act, and, to the best of such counsel's knowledge after
reasonable inquiry, no stop orders suspending the
effectiveness of the Registration Statement have been issued
and no proceedings for that purpose have been instituted or
are pending or threatened under the Act; and any required
filing of the Prospectus pursuant to Rule 424(b) of the Act
has been made in accordance with Rule 424(b);
(x) The Registration Statement and the
Prospectus, and each amendment or supplement thereto (other
than the financial statements, financial and statistical data
and supporting schedules included or incorporated by reference
in the Registration Statement and the Prospectus and each
amendment or supplement thereto, as to which such counsel need
express no opinion) as of the effective date of the
Registration Statement, complied as to form in all material
respects with the requirements of the Act and the Regulations;
(xi) The terms and provisions of the capital stock
of the Company conform in all material respects to the
description thereof contained in the Registration Statement
and Prospectus, and the information in the Prospectus under
the caption "Description of Capital Stock" to the extent that
it constitutes matters of law or legal conclusions, has been
reviewed by such counsel and is correct in all material
respects, and the form of certificate evidencing the Common
Stock complies with Delaware law;
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(xii) The descriptions in the Registration
Statement and the Prospectus, insofar as they are descriptions
of contracts, agreements or legal conclusions, are accurate
and fairly present the information required to be shown;
(xiii) To such counsel's knowledge after reasonable
inquiry, there are no agreements, contracts, leases or
documents of a character required to be described or referred
to in the Registration Statement or Prospectus or to be filed
as an exhibit to the Registration Statement that are not
described or referred to therein and filed as required;
(xiv) Neither the offer, sale or delivery of the
Company Shares, the execution, delivery or performance of this
Agreement, nor the consummation of the transactions
contemplated hereby will result in any violation of the
Company's charter or bylaws, or, to such counsel's knowledge
after reasonable inquiry, result in a breach or violation of
any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement,
bond, debenture, note agreement or other evidence of
indebtedness, or any lease, contract or other agreement or
instrument which has been filed as an exhibit to the
Registration Statement, or any applicable statute, rule or
regulation known to such counsel after reasonable inquiry or,
to such counsel's knowledge after reasonable inquiry, any
order, writ or decree of any court or governmental agency or
body having jurisdiction over the Company, or over any of the
Company's properties or operations; provided, however, that no
opinion need be rendered concerning Blue Sky laws;
(xv) No authorization, approval or consent of any
governmental authority or agency is necessary in connection
with the consummation of the transactions herein contemplated,
except such as have been obtained under the Act or as may be
required by the NASD, the NMS or under state or other
securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(xvi) To such counsel's knowledge after reasonable
inquiry, there are no legal or governmental proceedings
pending or threatened against the Company of a character that
are required to be disclosed in the Registration Statement or
the Prospectus, by the Act or the Regulations;
(xvii) To such counsel's knowledge after reasonable
inquiry, except as disclosed in the Registration Statement, no
holders of Common Stock or other securities of the Company
have registration rights with respect to securities of the
Company;
(xviii) The Company is not an "investment company" or
an entity "controlled" by an "investment company", as such
terms are defined in the Investment Company Act of 1940;
(xix) Each Selling Stockholder has duly authorized,
executed and delivered a Power of Attorney and Custody
Agreement which constitute valid
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<PAGE> 25
and legally binding agreements of such Selling Stockholder in
accordance with their terms, except as enforceability of the
same may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other
laws affecting creditors rights generally;
(xx) This Agreement has been duly and validly
executed and delivered by or on behalf of each Selling
Stockholder and constitutes the valid and legally binding
agreement of each Selling Stockholder enforceable against each
Selling Stockholder in accordance with its terms, except as
enforceability of the same may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally and except
as to those provisions relating to indemnity or contribution
for liability arising under federal or state securities laws
or under common law, as to which no opinion need be expressed;
(xxi) Upon delivery of the Shares pursuant to this
Agreement and payment therefor as contemplated herein, the
Underwriters will acquire good and marketable title to the
Shares, free and clear of any claim, lien, encumbrance,
security interest, or other restriction on transfer or other
defect in title;
(xxii) To the best knowledge of such counsel after
reasonable inquiry, all authorizations, orders and consents
necessary for the execution and delivery by each Selling
Stockholder of this Agreement, the Power of Attorney and the
Custody Agreement have been duly and validly given, and each
Selling Stockholder has full legal rights, power and authority
to enter into this Agreement, the Power of Attorney and the
Custody Agreement and to sell, assign, transfer and deliver to
the Underwriters the number of Shares to be sold by such
Selling Stockholder hereunder;
(xxiii) The performance of this Agreement and the
consummation of the transactions contemplated hereby and by
the Power of Attorney and the Custody Agreement will not
result in a breach or violation by such Selling Stockholder of
any of the terms or provisions of, or constitute a default by
such Selling Stockholder under, any indenture, mortgage, trust
(constructive or other), loan agreement or instrument known to
such counsel to which such Selling Stockholder is a party or
by which such Selling Stockholder is bound, any statute, or
any judgment, decree, order, rule or regulation known to such
counsel of any court or governmental agency or body applicable
to such Selling Stockholder;
(xxiv) Neither the Company nor any Subsidiary is in
violation of its respective certificate or articles of
incorporation or bylaws, or other organizational documents, or
to the best knowledge of such counsel after reasonable
inquiry, is in default in the performance of any material
obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness, except as
may be disclosed in the Prospectus; and
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<PAGE> 26
(xxv) To the best knowledge of such counsel after
reasonable inquiry, neither the Company nor any Subsidiary is
in violation of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or
any Subsidiary or of any decree of any court or governmental
agency or body having jurisdiction over the Company or any
Subsidiary.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company, and you,
at which the contents of the Registration Statement and Prospectus and related
matters were discussed and, although such counsel is not passing upon, and does
not assume any responsibility for, the accuracy, completeness or fairness of
the statements contained in the Registration Statement and Prospectus and has
not made any independent check or verification thereof, on the basis of the
foregoing (relying as to materiality to a large extent upon the statements of
officers and other representatives of the Company), no facts have come to such
counsel's attention that lead them to believe that either the Registration
Statement (including the incorporated documents) at the time such Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or the Prospectus (including the
incorporated documents) as of its date contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that such counsel need express no opinion with respect
to the financial statements, schedules and other financial and statistical data
included in the Registration Statement or Prospectus.
In giving their opinion, Berliner Zisser Walter & Gallegos, P.C. may
rely as to matters of law, other than the laws of the State of Delaware and the
Federal law of the United States, upon the opinions of counsel satisfactory to
you and as to matters of fact, to the extent Berliner Zisser & Gallegos, P.C.
deems appropriate, on certificates of responsible Company officers and public
officials.
(g) At the Closing Date and any Option Closing Date: (A)
the Registration Statement and any post-effective amendment thereto
and the Prospectus and any amendments or supplements thereto shall
contain all statements that are required to be stated therein in
accordance with the Act and the Regulations and shall conform, in all
material respects, to the requirements of the Act and the Regulations,
and neither the Registration Statement nor any post-effective
amendment thereto nor the Prospectus and any amendments or supplements
thereto shall contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading, (B) since the respective dates
as of which information is given in the Registration Statement and any
post-effective amendment thereto and the Prospectus and any amendments
or supplements thereto, except as otherwise stated therein, there
shall have been no material adverse change in the properties,
condition (financial or otherwise), results of operations,
stockholders' equity, business or management of the Company, from that
set forth therein, whether or not arising in the ordinary course of
business, other than as referred to in the Registration Statement or
Prospectus, (C) since the respective dates as of which information is
given in the Registration Statement and any post-effective amendment
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<PAGE> 27
thereto and the Prospectus or any amendment or supplement thereto,
there shall have been no transaction, contract or agreement entered
into by the Company, other than in the ordinary course of business and
as set forth in the Registration Statement or Prospectus that has not
been, but would be required to be, set forth in the Registration
Statement or Prospectus; (D) no action, suit or proceeding at law or
in equity shall be pending or, to the knowledge of the Company,
threatened against the Company that would be required to be set forth
in Prospectus, other than as set forth therein, and no proceedings
shall be pending or, to the knowledge of the Company, threatened
against the Company before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable
decision, ruling or finding would materially adversely affect the
properties, condition (financial or otherwise), results of operations,
stockholders' equity or business of the Company, other than as set
forth in the Prospectus. The Representative shall have received at
the Closing Date and any Option Closing Date certificates of each of
the Chief Executive Officer and the Chief Financial Officer of the
Company dated as of the date of the Closing Date or Option Closing
Date, as the case may be, and addressed to the Representative,
individually and as the Representative of the several Underwriters, to
the effect, that the conditions set forth in this subsection have been
satisfied and as to the accuracy and performance, as of the Closing
Date or the Option Closing Date, as the case may be, of the
agreements, representations and warranties of the Company set forth
herein.
(h) At the time this Agreement is executed and at the
Closing Date and any Option Closing Date, the Representative shall
have received a letter addressed to the Representative, individually
and as the Representative of the several Underwriters, and in form and
substance satisfactory to the Representative in all respects
(including the nonmaterial nature of the changes or decreases, if any,
referred to in clause (iii) below) from Grant Thornton LLP dated as of
the date of this Agreement, the Closing Date or Option Closing Date,
as the case may be:
(i) confirming that they are independent public
accountants within the meaning of the Act and the Regulations,
that they are members of the SEC Practice Section, and stating
that the section of the Registration Statement under the
caption "Experts" is correct insofar as it relates to them;
(ii) stating that, in their opinion, the financial
statements of the Company audited by them and included in the
Registration Statement comply in form in all material respects
with the applicable accounting requirements of the Act and the
Regulations;
(iii) stating that, on the basis of specified
procedures, which included a reading of the latest available
unaudited interim financial statements of the Company (with an
indication of the date of the latest available unaudited
interim financial statements), a reading of the minutes of the
meetings of the stockholders and the Board of Directors of the
Company and audit and compensation committees of such Board,
if any, and inquiries to certain officers and other employees
of the Company who are responsible for financial and
accounting matters and other specified procedures and
inquiries, nothing has come to their attention that would
cause them to believe that (A) the unaudited financial
statements and related schedules of the Company included in
the
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<PAGE> 28
Registration Statement, if any, (I) do not comply in form in
all material respects with the applicable accounting
requirements of the Act and the Regulations or (II) were not
fairly presented in conformity with generally accepted
accounting principles on a basis substantially consistent with
that of the audited financial statements and related schedules
included in the Registration Statement or (B)(I) at a
specified date, not more than five business days prior to the
date of such letter there was any change in the capital stock
or short-term or long-term debt of the Company, or any
decrease (increase) in net current assets, total assets or
stockholders' equity as compared with the amounts shown in the
May 31, 1996 unaudited balance sheet of the Company included
in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement and Prospectus, and
(II) during the period from June 1, 1996 to a specified date
not more than five business days prior to the date of such
letter, there has been any decrease (increase), as compared
with the corresponding period in the preceding year, in
revenues, operating income or income before income taxes or in
total or per share amounts of net income of the Company or, if
there was any such change or decrease (increase), setting
forth the amount of such change or decrease (increase); and
(iv) stating that they have compared specific
dollar amounts, numbers of shares and other information
(including pro forma information) pertaining to the Company
set forth in the Registration Statement and Prospectus that
have been specified by the Representative prior to the date of
this Agreement, to the extent that such amounts, numbers,
percentages and information may be derived from the general
accounting or other records of the Company with the result
obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not
constitute an audit in accordance with generally accepted
auditing standards) set forth in the letter, and found them to
be in agreement.
(i) At the Closing Date and any Option Closing Date, the
Representative shall have been furnished such additional documents and
certificates as it shall reasonably request.
(j) No action shall have been taken by the NASD the
effect of which is to make it improper, at any time prior to the
Closing Date or any Option Closing Date, for members of the NASD to
execute transactions as principal or as agent in the Shares or to
trade or deal in the Shares, and no proceedings for the purpose of
taking such action shall have been instituted or shall be pending or,
to the Company's or the Representative's knowledge, shall be
contemplated by the NASD.
If any conditions to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or any Option Closing Date, as the
case may be, shall not have been fulfilled, the Representative may on behalf of
the several Underwriters terminate this Agreement or, if it so elects, waive
any such conditions which have not been fulfilled or extend the time for their
fulfillment.
9. INDEMNIFICATION.
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(a) The Company and each Selling Stockholder, jointly and
severally, shall indemnify and hold harmless each Underwriter, and
each member of the selling group, and each person, if any, who
controls each Underwriter and each member of the selling group, within
the meaning of the Act or the Exchange Act, and each of their
officers, directors, partners, employees, agents and counsel, against
any and all loss, liability, claim, damage and expense whatsoever,
joint or several, as incurred, including, but not limited to,
attorneys' fees, any and all expense whatsoever incurred in
investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever or in connection with
any investigation or inquiry of, or action or proceeding that may be
brought against, the respective indemnified parties, arising out of or
based upon (i) any untrue statements or alleged untrue statements of a
material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or
supplement to the Preliminary Prospectus, Registration Statement or
the Prospectus or any application or other document, including, but
without limitation "Blue Sky" applications, documents or
correspondence (in this Section 9 collectively called "application")
executed by the Company and based upon written information furnished
by or on behalf of the Company filed in any jurisdiction in order to
qualify all or any part of the Shares under the securities laws
thereof or filed with the SEC or the NASD, (ii) the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (iii) any
breach of any representation, warranty, covenant or agreement of the
Company or any Selling Stockholder contained in this Agreement;
provided, however, that the foregoing indemnity shall not apply in
respect of and to the extent of any statement or omission made in
reliance upon and in conformity with written information furnished to
the Company or any Underwriter through the Representative expressly
for use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment or supplement thereof. It is understood
that the statements appearing in any Preliminary Prospectus, the
Prospectus or the Registration Statement (A) on the inside front
cover page with respect to stabilization and passive market making,
(B) in the section entitled "Underwriting," and (C) in the section
entitled "Legal Matters" with respect to the identity of counsel for
the Underwriters constitute the only information furnished in writing
by or on behalf of any Underwriter for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement. This
indemnity agreement will be in addition to any liability the Company
or any Selling Stockholder may otherwise have.
(b) The Underwriters, agree to indemnify and hold
harmless the Company, each of the directors of the Company, each of
the officers of the Company who shall have signed the Registration
Statement, each other person, if any, who controls the Company within
the meaning of the Act or the Exchange Act, the employees, agents and
counsel to the Company and each Selling Stockholder to the same extent
as the foregoing indemnities from the Company and the Selling
Stockholders to the several Underwriters, but only with respect to any
loss, liability, claim, damage or expense resulting from statements or
omissions, or alleged statements or omissions, if any, made in any
Preliminary Prospectus, Registration Statement or Prospectus or any
amendment or supplement thereof or any application in reliance upon,
and in conformity with, written information furnished to the Company
by any Underwriter through the Representative with respect to any
Underwriter by or on behalf of such
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<PAGE> 30
Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement
thereof or any application, as the case may be. This indemnity
agreement will be in addition to any liability such Underwriter may
otherwise have.
(c) If any action, inquiry, investigation or proceeding
is brought against any person in respect of which indemnity may be
sought pursuant to any of the two preceding paragraphs, such person
(hereinafter called the "indemnified party") shall, promptly after
formal notification of, or receipt of service of process for, such
action, inquiry, investigation or proceeding, notify in writing the
party or parties against whom indemnification is to be sought
(hereinafter called the "indemnifying party") of the institution of
such action, inquiry, investigation or proceeding and the indemnifying
party, upon the request of the indemnified party, shall assume the
defense of such action, inquiry, investigation or proceeding,
including the employment of counsel (reasonably satisfactory to such
indemnified party) and payment of expenses. No indemnification
provided for in this Section 9 shall be available to any indemnified
party who shall fail to give such notice if the indemnifying party
does not have knowledge of such action, inquiry, investigation or
proceeding and shall have been materially prejudiced by the failure to
give such notice, but the omission so to notify the indemnifying party
shall not relieve the indemnifying party otherwise than under this
Section 9. Such indemnified party or controlling person shall have
the right to employ its or their own counsel in any such case, but the
fees and expenses of such counsel shall be at the expense of such
indemnified party unless the employment of such counsel shall have
been authorized in writing by the indemnifying party in connection
with the defense of such action or the indemnifying party shall not
have employed counsel to have charge of the defense of such action,
inquiry, investigation or proceeding or in the case of the
Underwriters, the Underwriters or any of them shall have been advised
by counsel that it is advisable that they or any of them be
represented by their own counsel, in any of which events the
reasonable fees and expenses of such counsel shall be borne by the
indemnifying party. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more
than one separate counsel (in addition to one local counsel in each
jurisdiction in which any proceeding may be brought) for all
indemnified parties. In the case of any such separate counsel for the
Underwriters, such firm shall be designated in writing by the
Representative. Expenses covered by the indemnification in this
subsection (c) of this Section 9 shall be paid by the indemnifying
party as they are incurred by the indemnified party. Anything in this
subsection to the contrary notwithstanding, the indemnifying party
shall not be liable for any settlement of any such claim effected
without its written consent. The indemnifying party shall promptly
notify the indemnified party of the commencement of any litigation,
inquiry, investigation or proceeding against the indemnifying party or
any of its officers or directors in connection with the issue and sale
of any of the Shares or in connection with such Preliminary
Prospectus, Registration Statement or Prospectus or any amendment or
supplement or any of the foregoing or any such application.
(d) If the indemnification provided for in this Section 9
is unavailable to or is insufficient to hold harmless an indemnified
party under subsections (a) and (b) of this Section 9, then each
indemnifying party shall contribute to the amount paid or
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<PAGE> 31
payable by such indemnified party as a result of such losses,
liabilities, claims, damages or expenses (or actions, inquiries,
investigations or proceedings in respect thereof) referred to in
subsections (a) or (b) of this Section 9 in such proportion as is
appropriate to reflect the relative benefits received by the Company
and the Selling Stockholders on the one hand and the Underwriters on
the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not
permitted by applicable law, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in
such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such
losses, liabilities, claims or expenses (or actions, inquiries,
investigations or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative faults shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
the Company and the Selling Stockholders on the one hand or the
Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contributions
pursuant to this section (d) of this Section 9 were determined by pro
rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any method or allocation that does not take
account of the equitable considerations referred to above in this
subsection (d) of this Section 9. The amount paid or payable by an
indemnified party as a result of the losses, liabilities, claims,
damages or expenses (or actions, inquiries, investigations or
proceedings in respect thereof) referred to above in this subsection
(d) of this Section 9 shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d) of this Section
9, (i) the provisions of the Agreement Among Underwriters shall govern
contribution among Underwriters, (ii) no Underwriter (except as
provided in the Agreement Among Underwriters) or controlling person of
such Underwriter shall be required to contribute any amount in excess
of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter less the aggregate amount of any damages
which such Underwriter and its controlling persons have otherwise been
required to pay in respect of the same or any substantially similar
claims and (iii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligation in this subsection
(d) of this Section 9 to contribute are several in proportion to their
respective underwriting obligations and not joint.
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<PAGE> 32
The obligations of the Company and the Selling Stockholders
under this Section 9 shall be in addition to any liability which the
Company or any Selling Stockholder may otherwise have, and shall
extend, upon the same terms and conditions to each officer, director,
employee, agent or counsel of each Underwriter and to each person, if
any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section 9 shall be in
addition to any liability that the respective Underwriters may
otherwise have, and shall extend, upon the same terms and conditions,
to each of the officers and directors of the Company who have signed
the Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act and to each employee, agent
and counsel to the Company, in either case, whether or not such person
is a party to any action or proceeding.
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as
the context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Date and any Option Closing Date; and such
representations, warranties and agreements of the Underwriters, the Company and
the Selling Stockholders, including without limitation the indemnity and
contribution agreements contained in Section 9 hereof and the agreements
contained in Sections 7, 10, 11 and 14 hereof, shall remain operative and in
full force and effect for a period of the applicable federal and state statutes
of limitations regardless of any investigation made by or on behalf of any
Underwriter or any controlling person, and shall survive delivery of the Shares
and termination of this Agreement, whether before or after the Closing Date or
any Option Closing Date.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
(a) This Agreement shall become effective immediately as
to Sections 7, 9, 10, 11 and 14 and, as to all other provisions, (i)
if at the time of execution and delivery of this Agreement the
Registration Statement has not become effective, at 9:30 A.M., Denver,
Colorado time, on the first business day following the Effective Date,
or (ii) if at the time of execution and delivery of this Agreement the
Registration Statement has been declared effective, at 9:30 A.M.,
Denver, Colorado time, on the date of execution of this Agreement; but
this Agreement shall nevertheless become effective at such earlier
time after the Registration Statement becomes effective as the
Representative may determine by notice to the Company or by release of
any of the Shares for sale to the public. For the purposes of this
Section 11, the Shares shall be deemed to have been so released upon
the release for publication of any newspaper advertisement relating to
the Shares or upon the release by the Representative of telegrams (i)
advising the Underwriters that the Shares are released for public
offering or (ii) offering the Shares for sale to securities dealers,
whichever may occur first. The Representative may prevent the
provisions of this Agreement (other than those contained in Sections
7, 9, 10, 11 and 14) hereof from becoming effective without liability
of any party to any other party, except as noted below, by giving the
notice indicated in subsection (c) of this Section 11 before the time
the other provisions of this Agreement become effective.
(b) The Representative shall have the right to terminate
this Agreement at any time prior to the Closing Date as provided in
Sections 8 and 12 hereof or if any of
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the following have occurred: (i) the Company has failed, refused or
been unable, at or prior to the Closing Date, to perform any agreement
on its part to be performed hereunder; (ii) any other condition to the
obligations of the Underwriters hereunder is not fulfilled; (iii)
since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change
or any development involving a prospective material adverse change in
or materially affecting the condition or obligations, financial or
otherwise, of the Company, or the revenues, earnings, business
affairs, management or business prospects of the Company, whether or
not arising in the ordinary course of business; (iv) any outbreak of
hostilities or other national or international calamity or crisis or
change in economic, political or financial market conditions if such
outbreak, calamity, crisis or change would, in the Representative's
reasonable judgment, have a material adverse effect on the Company,
the financial markets of the United States or the offering or delivery
of the Shares; (v) suspension of trading generally in securities on
the New York Stock Exchange, the American Stock Exchange, the NMS or
the over-the-counter market generally or limitation on prices (other
than limitations on hours or numbers of days of trading) for
securities or the promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority
which in the Representative's reasonable opinion materially and
adversely affects trading on any Exchange, the NMS or the
over-the-counter market; (vi) the decrease in either the Dow Jones
Industrial Exchange or the Nasdaq Composite Index of 15% or more from
their respective closings on the day immediately preceding the date
the Registration Statement becomes effective; (vii) the enactment,
publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of any court or other governmental
authority which in the Representative's reasonable opinion materially
and adversely affects or will within the following twelve month period
materially and adversely affect the business or operations of the
Company; (viii) declaration of a banking moratorium by either federal
or state authorities; (ix) the taking of any action by any federal,
state or local government or agency in respect of its monetary or
fiscal affairs which in the Representative's reasonable opinion has a
material adverse effect on the securities markets in the United
States; (x) declaration of a moratorium in foreign exchange trading by
major international banks or other institutions; or (xi) trading in
any securities of the Company shall have been suspended or halted by
the NASD or the SEC.
(c) If the Representative elects to prevent this
Agreement from becoming effective or to terminate this Agreement as
provided in this Section 11, the Representative shall notify the
Company thereof promptly by telephone, telex, telegraph or facsimile,
confirmed by letter.
12. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in
its or their obligation to purchase Offered Shares or Optional Shares
hereunder, and if the Offered Shares or Optional Shares with respect
to which such default relates do not exceed the aggregate of 10
percent of the number of Offered Shares or Optional Shares, as the
case may be, that all Underwriters have agreed to purchase hereunder,
then such Offered Shares or Optional Shares to which the default
relates shall be purchased severally by the non-defaulting
Underwriters in proportion to their respective commitments hereunder.
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<PAGE> 34
(b) If such default relates to more than 10 percent of
the Offered Shares or Optional Shares, as the case may be, the
Representative may in its discretion arrange for another party or
parties (including a non-defaulting Underwriter) to purchase such
Offered Shares or Optional Shares to which such default relates, on
the terms contained herein. In the event that the Representative does
not arrange for the purchase of the Offered Shares or Optional Shares
to which a default relates as provided in this Section 12, this
Agreement may be terminated by the Representative or by the Company
without liability on the part of the several Underwriters (except as
provided in Section 9 hereof) or the Company (except as provided in
Sections 7 and 9 hereof), but nothing herein shall relieve a
defaulting Underwriter of its liability, if any, to the other several
Underwriters and to the Company for damages occasioned by its default
hereunder.
(c) If the Offered Shares or Optional Shares to which the
default relates are to be purchased by the non- defaulting
Underwriters, or are to be purchased by another party or parties as
aforesaid, the Representative or the Company shall have the right to
postpone the Closing Date or any Option Closing Date, as the case may
be, for a reasonable period but not in any event exceeding seven days,
in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus or in any other documents
and arrangements, and the Company agrees to file promptly any
amendment to the Registration Statement or supplement to the
Prospectus which in the opinion of counsel for the Underwriters may
thereby be made necessary. The terms "Underwriters" and "Underwriter"
as used in this Agreement shall include any party substituted under
this Section 12 with like effect as if it had originally been a party
to this Agreement with respect to such Offered Shares or Optional
Shares.
13. INFORMATION FURNISHED BY UNDERWRITERS. The statements
appearing in any Preliminary Prospectus, the Prospectus or the Registration
Statement (a) on the inside front cover page with respect to stabilization and
passive market-making, (b) in the section entitled "Underwriting," and (c) in
the section entitled "Legal Matters" with respect to the identity of counsel
for the Underwriters constitute the only information furnished in writing by or
on behalf of any Underwriter for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement referred to in subsection (b) of
Section 1 hereof and subsections (a) and (b) of Section 9 hereof.
14. NOTICES. All communications hereunder, except as herein
otherwise specifically provided, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, telexed, telegrammed, telegraphed or
telecopied and confirmed to such Underwriter, c/o Cruttenden Roth Incorporated,
18301 Von Karman, Suite 100, Irvine, California 72715, Attention: President,
with a copy to O'Melveny & Myers LLP, 610 Newport Center Drive, Suite 1700,
Newport Beach, California 92660-6429, Attention: J. Jay Herron, Esq.; if sent
to the Company or the Selling Stockholders shall be mailed, delivered, telexed,
telegrammed, telegraphed or telecopied and confirmed to Q.E.P. Co., Inc., 990
South Rogers Circle, Boca Raton, Florida 33487 Attention: Lewis Gould, with a
copy to Berliner Zisser Walter & Gallegos, P.C., One Norwest Center, 1700
Lincoln Street, Suite 4700, Denver, Colorado 80203-4557, Attention: Robert W.
Walter, Esq.
34
<PAGE> 35
15. PARTIES. This Agreement shall inure solely to the benefit of,
and shall be binding upon, the several Underwriters, the Company, the Selling
Stockholders, and the controlling persons, directors, officers, employees,
agents and counsel referred to in Section 9 hereof, and their respective
successors, assigns, heirs and legal representatives, and no other person shall
have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provision herein
contained. The term "successors" and "assigns" shall not include any purchaser
of the Shares merely because of such purchase.
16. DEFINITION OF BUSINESS DAY. For purposes of this Agreement,
"business day" means any day on which the New York Stock Exchange, Inc. is open
for trading.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and all such counterparts will constitute one and the same
instrument.
18. CONSTRUCTION. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
agreements made and performed entirely within such State.
If the foregoing correctly sets forth the understanding among the
Underwriters, the Company and the Selling Stockholders, please so indicate in
the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement by and among the Underwriters, the Company and
the Selling Stockholders.
Very truly yours,
Q.E.P. CO., INC.,
a Delaware corporation
By:
----------------------------------
Name:
Title:
The foregoing Underwriting Agreement Each of the Selling Stockholders
is hereby confirmed and accepted as
of the date first above written.
By:
----------------------------------
Lewis Gould, Attorney-in-fact
CRUTTENDEN ROTH INCORPORATED
By:
----------------------------------
Name:
Title:
Acting severally on behalf of itself and the
several Underwriters named in Schedule I hereto
35
<PAGE> 36
SCHEDULE I
UNDERWRITERS
NUMBER OF SHARES
UNDERWRITER TO BE PURCHASED
----------- ----------------
Cruttenden Roth Incorporated . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . 1,200,000
=========
<PAGE> 37
SCHEDULE II
SELLING STOCKHOLDERS
Number of
Shares to be
Selling Stockholders Sold
-------------------- ------------
Lewis Gould . . . . . . . . . . . . . . 100,000
Susan Gould . . . . . . . . . . . . . . 100,000
-------
Total . . . . . . . . . . . . 200,000
=======
<PAGE> 38
SCHEDULE III
PERSONS SUBJECT TO LOCKUP AGREEMENTS
SHARES SUBJECT TO
NAME LOCK-UP AGREEMENT
---- -----------------
Lewis Gould
Susan Gould
Leonard Gould
_______ Gould
<PAGE> 1
EXHIBIT 2.1
AGREEMENT OF MERGER
BETWEEN
Q.E.P. CO., INC.
(A NEW YORK CORPORATION)
AND
Q.E.P. CO., INC.
(A DELAWARE CORPORATION)
AGREEMENT OF MERGER dated this ________ day of August, 1996 by and
between Q.E.P. Co., Inc., a New York corporation (hereinafter referred to as
the "Merging Corporation"), and Q.E.P. Co., Inc., a Delaware corporation
(hereinafter referred to as the "Surviving Corporation"), pursuant to Section
252 of the Delaware General Corporation Law and Section 907 of the New York
Business Corporation Law.
WITNESSETH THAT:
WHEREAS, the parties to this Agreement, in consideration of the mutual
agreements of each corporation as set forth herein, deem it advisable and
generally for the welfare of said corporations that the Merging Corporation
merge into the Surviving Corporation under and pursuant to the terms and
conditions hereinafter set forth;
NOW, THEREFORE, the corporations, parties to this Agreement, by and
between their respective Boards of Directors, in consideration of the mutual
covenants, agreements and provisions hereinafter contained do hereby agree upon
and prescribe the terms and conditions of said merger, the mode of carrying
them into effect and the manner and basis of converting the shares of the
Merging Corporation into the shares of the Surviving Corporation, as follows:
FIRST: Q.E.P. Co., Inc., a Delaware corporation, hereby merges into
itself Q.E.P. Co., Inc., a New York corporation, and said Q.E.P. Co., Inc., a
New York corporation shall be and hereby is merged into Q.E.P. Co., Inc., a
Delaware corporation pursuant to Section 907 of the New York Business
Corporation Law and Section 252 of the Delaware General Corporation Law. The
name of the Surviving Corporation is Q.E.P. Co., Inc., a Delaware corporation,
which shall be its name following the merger.
SECOND: From and after the effective date of the merger and until
further amended as provided by the laws of the State of Delaware, the
Certificate of Incorporation of Q.E.P. Co., Inc., a Delaware corporation, as in
effect at the effective date of the merger shall be and shall continue to be
the Certificate of Incorporation of the corporation surviving this merger.
<PAGE> 2
THIRD: The By-Laws of Q.E.P. Co., Inc., a Delaware corporation, as
they shall exist on the effective date of this merger shall be and remain the
By-Laws of the Surviving Corporation until the same shall be altered, amended
or repealed as therein provided.
FOURTH: As to each constituent corporation, the designation and
number of outstanding shares of each class and series and the voting rights
thereof are as follows:
<TABLE>
<CAPTION>
DESIGNATION AND NUMBER CLASS OR SHARES ENTITLED
OF SHARES IN EACH CLASS SERIES OF SHARES TO VOTE AS A
NAME OF CORPORATION OR SERIES OUTSTANDING ENTITLED TO VOTE CLASS OR SERIES
- ------------------- ------------------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Q.E.P. Co., Inc.,
a Delaware corporation Common Stock 1 Yes 1
Series A Preferred -0- No -0-
Series B Preferred -0- No -0-
Series C Preferred -0- No -0-
Q.E.P. Co., Inc.,
a New York corporation Common Stock 200 Yes 200
Series A Preferred 425,547 No -0-
Series B Preferred 60,000 No -0-
Series C Preferred 17,500 No -0-
</TABLE>
FIFTH: The terms and conditions of the merger are as follows:
The directors and officers of the Surviving Corporation on the
effective date of this merger, shall continue to be the directors and officers
of the Surviving Corporation.
Upon the merger becoming effective, the separate existence of the
Merging Corporation shall cease and all the property, rights, privileges,
franchises, patents, trademarks, licenses, registrations and other assets of
every kind and description of the Merging Corporation shall be transferred to,
vested in and devolve upon the Surviving Corporation without further act or
deed and all property, rights, and every other interest of the Surviving
Corporation and the Merging Corporation shall be as effectively the property of
the Surviving Corporation as they were of the Surviving Corporation and the
Merging Corporation, respectively. The Merging Corporation hereby agrees, from
time to time, as and when requested by the Surviving Corporation or by its
successors or assigns, to execute and deliver or cause to be executed and
delivered all such deeds and instruments and to take or cause to be taken such
further or other action as the Surviving Corporation may deem necessary or
desirable in order to vest in and confirm to the Surviving Corporation title to
and possession of any property of the Merging Corporation acquired or to be
acquired by reason of or as a result of the merger herein provided for and
otherwise to carry out the intent and purposes hereof and the proper officers
and directors of the Merging Corporation and the proper officers and directors
of the Surviving Corporation are fully authorized in the name of the Merging
Corporation or otherwise to take any and all such action.
-2-
<PAGE> 3
All rights of creditors and all liens upon the property of either of
said corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the Merging Corporation shall thence forth attach to the Surviving
Corporation and may be enforced against it to the same extent as if said debts,
liabilities and duties had been incurred or contracted by it.
SIXTH: The manner of converting shares of each of the Merging
Corporation into shares of the Surviving Corporation shall be as follows:
(a) At the effective date of the merger, the one outstanding share
of Common Stock of the Surviving Corporation shall be cancelled and shall
return to the status of authorized but unissued Common Stock.
(b) Each holder of issued and outstanding shares of Common Stock
of the Merging Corporation at the effective date of the merger (excluding
shares held by those shareholders of the Merging Corporation who have perfected
their rights as dissenting shareholders) shall be entitled, upon surrender of
his certificate as set forth in Section (c) below, to receive for each share of
Common Stock of the Merging Corporation 7,500 shares of Common Stock of the
Surviving Corporation. Each holder of issued and outstanding shares of either
Series A, Series B or Series C Preferred Stock of the Merging Corporation at
the effective date of the merger shall be entitled, upon surrender of his
certificate as set forth in Section (c) below, to receive for each one share of
Preferred Stock of the Merging Corporation one share of Preferred Stock of the
same class of the Surviving Corporation.
(c) After the effective date of the merger, each holder of an
outstanding certificate or certificates which prior thereto represented shares
of the Merging Corporation shall surrender the same to the transfer agent and
registrar of the Surviving Corporation and such holder shall be entitled upon
such surrender to receive in exchange therefor a certificate or certificates
representing the number of shares of Common Stock or Preferred Stock of the
Surviving Corporation for which the shares theretofore represented by the
certificate or certificates so surrendered are exchangeable as aforesaid.
Until so surrendered, each such outstanding certificate which prior to the
effective date of the merger represented shares of the Merging Corporation
shall be deemed for all corporate purposes to be exchanged and the holders of
such certificates shall cease to have any rights with respect to such shares of
the Merging Corporation (except such rights, if any, as they may have as
dissenting shareholders) and their sole right shall be with respect to the
shares of the Surviving Corporation for which their shares are exchangeable
pursuant to this Agreement. On the effective date of the merger, the shares of
the Merging Corporation outstanding on such date shall cease to be shares of
the Merging Corporation.
SEVENTH: The Surviving Corporation agrees that it will promptly pay
to the dissenting shareholders of the Merging Corporation the amount, if any,
to which they are entitled with respect to the rights of dissenting
shareholders.
EIGHTH: The Surviving Corporation shall assume all responsibility for
any accrued but unpaid dividends of the Merging Corporation.
-3-
<PAGE> 4
NINTH: This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same document.
TENTH: This Agreement of Merger shall become effective when this
Agreement and the constituent corporations' certificates required by Section
252 of the General Corporation Law of the State of Delaware and Section 907 of
the Business Corporation Law of the State of New York have been filed and
become effective pursuant to the General Corporation Law of the State of
Delaware and the Business Corporation Law of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement of
Merger to be executed by their respective officers thereunto duly authorized on
this _____ day of August, 1996.
Q.E.P. CO., INC.,
a New York corporation
By:
----------------------------------------------------
Lewis Gould, President and Chief Executive Officer
By:
----------------------------------------------------
Susan J. Gould, Vice President and Secretary
Q.E.P. CO., INC.,
a Delaware corporation
By:
----------------------------------------------------
Lewis Gould, President and Chief Executive Officer
By:
----------------------------------------------------
Susan J. Gould, Vice President and Secretary
-4-
<PAGE> 5
CERTIFICATE OF SECRETARY OF Q.E.P. CO., INC.
I, Susan J. Gould, Secretary of Q.E.P. Co., Inc., a corporation
organized and existing under the laws of the State of Delaware, hereby certify,
as such Secretary, that the Agreement of Merger to which this Certificate is
attached, after having been first duly signed on behalf of the said corporation
and having been signed on behalf of Q.E.P. Co., Inc., a corporation of the
State of New York, was duly adopted pursuant to section 228 of the General
Corporation Law of Delaware by the unanimous written consent of the
stockholders holding 1,500,000 shares of the capital stock of the corporation,
same being all of the shares issued and outstanding having voting power, and
written notice of adoption of the Agreement of Merger has been given as
provided in section 228 of the General Corporation Law of Delaware to every
stockholder entitled to such notice, which Agreement of Merger was thereby
adopted as the act of the stockholders of said Q.E.P. Co., Inc., a Delaware
corporation, and duly adopted agreement and act of the said corporation.
WITNESS my hand on this ____ day of August, 1996.
______________________________
Susan J. Gould, Secretary
-5-
<PAGE> 1
EXHIBIT 3.3
INDEMNIFICATION AGREEMENT
This Indemnification Agreement, made and entered into this day of
________________, 1996 ("Agreement"), by and between Q.E.P. Co., Inc., a
Delaware corporation (the "Company") and _______________________
("Indemnitee").
WHEREAS, highly competent persons are becoming more reluctant to serve
publicly-held corporations as directors or in other capacities unless they are
provided with adequate protection through insurance or adequate indemnification
against inordinate risks of claims and actions against them arising out of
their service to and activities on behalf of the corporation, and
WHEREAS, the Board of Directors of the Company has determined that the
inability to attract and retain such persons is detrimental to the best
interests of the Company's stockholders and that the Company should act to
assure such persons that there will be increased certainty of such protection
in the future; and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest
extent permitted by applicable law so that they will serve or continue to serve
the Company free from undue concern that they will not be so indemnified; and
WHEREAS, Indemnitee is willing to serve, continue to serve and to take
on additional service for or on behalf of the Company on the condition that
Indemnitee be so indemnified;
NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, including Indemnitee's
continued service to the Company, the Company and Indemnitee hereby covenant
and agree as follows:
ARTICLE I - DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meaning given here:
1.01 "Board" shall mean the Board of Directors of the Company.
1.02 "Corporate Status" describes the status of a person who is or
was a director, officer, employee, agent or fiduciary of the Company or of any
other corporation, partnership, joint venture, trust, employee benefit or other
enterprise which such person is or was serving at the express written request
of the Company.
1.03 "Covered Act" means any breach of duty, neglect, error,
misstatement, misleading statement, omission or other act done or wrongfully
attempted by Indemnitee or against any of the foregoing alleged by any claimant
or any claim against Indemnitee solely by reason of being a director or officer
of the Company.
1.04 "D&O Insurance" means the directors' and officers' liability
insurance issued by the insurer(s), and having the policy number(s), amount(s)
and deductible(s) set forth on Exhibit A hereto and any replacement or
substitute policies issued by one or more reputable insurers
<PAGE> 2
providing in all respects coverage at least comparable to and in the same
amount as that provided under the policy or policies identified on Exhibit A.
1.05 "Determination" means a determination, based on the facts
known at the time, made by:
(a) A majority vote of a quorum of disinterested
directors; or
(b) Independent Counsel in a written opinion prepared at
the request of a majority of a quorum of Disinterested Directors; or
(c) A majority of the disinterested stockholders of the
Company; or
(d) A final adjudication by a court of competent
jurisdiction.
"Determined" shall have a correlative meaning.
1.06 "Disinterested Director" means a director of the Company who
is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
1.07 "Effective Date" means ____________________________, 19____.
1.08 "Excluded Claim" means any payment for Losses or Expenses in
connection with any claim:
(a) Based upon or attributable to Indemnitee gaining in
fact any personal profit or advantage to which Indemnitee is not
entitled; or
(b) For the return by Indemnitee of any remuneration paid
to Indemnitee without the previous approval of the stockholders of the
Company which is illegal; or
(c) For an accounting of profits in fact made from the
purchase or sale by Indemnitee of securities of the Company within the
meaning of Section 16 of the Securities Exchange Act of 1934, as
amended, or similar provisions of any state law; or
(d) Resulting from Indemnitee's knowingly fraudulent,
dishonest or willful misconduct; or
(e) The payment of which by the Company under this
Agreement is not permitted by applicable law.
1.09 "Expenses" shall include all reasonable attorneys fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a witness in
a Proceeding, but shall not include Fines.
-2-
<PAGE> 3
1.10 "Fines" mean any fine, penalty or, with respect to an employee
benefit plan, any excise tax or penalty assessed with respect thereto.
1.11 "Good Faith" shall mean Indemnitee having acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and, with respect to any criminal Proceeding,
having had no reasonable cause to believe Indemnitee's conduct was unlawful.
1.12 "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past three years has been, retained to represent (i) the Company
or indemnitee in any matter material to either such party or (ii) any other
party to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee's rights under this
Agreement.
1.13 "Loss" means any amount which Indemnitee is legally obligated
to pay as a result of a claim or claims made against him for Covered Acts
including, without limitation, damages and judgments and sums paid in
settlement of a claim or claims, but shall not include Fines.
1.14 "Proceeding" includes any action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any
other actual threatened or completed proceeding whether civil, criminal,
administrative or investigative, other than one initiated by Indemnitee. For
purposes of the foregoing sentence, a "Proceeding" shall not be deemed to have
been initiated by Indemnitee where Indemnitee seeks pursuant to Article IX of
this Agreement to enforce Indemnitee's rights under this Agreement relating
thereto.
ARTICLE II - SERVICES BY INDEMNITEE
Indemnitee agrees to serve as a(n) (director) (officer) (employee).
Indemnitee may at any time and for any reason resign from such position
(subject to any other contractual obligation or any obligation imposed by
operation of law).
ARTICLE III - MAINTENANCE OF D&O INSURANCE
3.01 DESCRIPTION OF D&O INSURANCE. Exhibit A contains a complete
and accurate description of the policies of directors' and officers' liability
insurance purchased by the Company, if any.
3.02 NAMED INSURED. In any policies of D&O Insurance which are
maintained by the Company Indemnitee shall be named as an insured in such a
manner as to provide Indemnitee the same rights and benefits, subject to the
same limitations, as are accorded to the Company's directors and officers most
favorably insured by such policy.
3.03 NO OBLIGATION. Nothing herein shall impose upon the Company
the obligation to maintain D&O Insurance if the Company determines in good
faith that such insurance is not reasonably available, the premium costs for
such insurance are disproportionate to the amount
-3-
<PAGE> 4
of coverage provided, or the coverage provided by such insurance is limited by
exclusions so as to provide an insufficient benefit.
ARTICLE IV - INDEMNIFICATION
4.01 INDEMNIFICATION IN GENERAL. The Company shall indemnify and
hold Indemnitee harmless for any Losses, Expenses, judgments, penalties, Fines
and amounts paid in settlement actually and reasonably incurred by Indemnitee
or on Indemnitee's behalf in connection with such Proceeding or any claim,
issue or matter therein, if Indemnitee acted in Good Faith.
4.02 EXCLUDED COVERAGE. The Company shall have no obligation to
indemnify and hold Indemnitee harmless from any Losses or Expense which has
been Determined to constitute an Excluded Claim. Notwithstanding the
provisions of Section 4.01, no such indemnification shall be made in respect of
any claim, issue or matter in such Proceeding as to which Indemnitee shall have
been adjudged to be liable to the Company if applicable law prohibits such
indemnification; provided, however, that, if applicable law so permits,
indemnification shall nevertheless be made by the Company in such event if and
only to the extent that the Court of Chancery of the State of Delaware, or the
court in which such Proceeding shall have been brought or pending, shall
Determine.
4.03 INDEMNIFICATION OF A PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL.
Notwithstanding any other provision of this Agreement, to the extent that
Indemnitee is, by reason of Indemnitee's Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, Indemnitee shall be
indemnified to the maximum extent permitted by law, against all Losses,
Expenses, judgments, penalties, Fines and amounts paid in settlement, actually
and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee to the maximum extent permitted by law, against all Losses,
Expenses, judgments, penalties, Fines and amounts paid in settlement, actually
and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection
with each successfully resolved claim, issue or matter. For purposes this
Section 4.03 and without limitation, the termination of any claim, issue or
matter in such a Proceeding by dismissal, with or without prejudice, shall be
deemed to be a successful result as to such claim, issue or matter, so long as
there has been no finding (either adjudicated or pursuant to Article VI)
Indemnitee did not act in Good Faith.
4.04 INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding
any other provision of this Agreement to the extent that Indemnitee is, by
reason of Indemnitee's Corporate Status, a witness in a Proceeding, Indemnitee
shall be indemnified against all Losses and Expenses actually and reasonably
incurred by Indemnitee or on Indemnitee's behalf in connection therewith.
ARTICLE V - ADVANCEMENT OF EXPENSES
Notwithstanding any provision to the contrary in Article VI, the
Company shall advance all reasonable Expenses which, by reason of Indemnitee's
Corporate Status, are incurred by or on behalf of Indemnitee in connection with
any Proceeding, within twenty (20) days after the
-4-
<PAGE> 5
receipt by the Company of a statement or statements from Indemnitee requesting
such advance or advances, whether prior to or after final disposition of such
Proceeding. Such statement or statements shall reasonably evidence the
Expenses incurred by Indemnitee and shall include or be preceded or accompanied
by an undertaking by or on behalf of Indemnitee to repay any Expenses if it
shall ultimately be determined that Indemnitee is not entitled to be
indemnified against such Expenses. Any advance and undertakings to repay
pursuant to this Article V shall be unsecured and interest free.
ARTICLE VI - PROCEDURES FOR DETERMINATION OF ENTITLEMENT
6.01 INITIAL NOTICE. Promptly after receipt by Indemnitee of
notice of the commencement of or the threat of commencement of any Proceeding,
Indemnitee shall, if indemnification with respect thereto may be sought from
the Company under this Agreement, notify the Company of the commencement
thereof. Indemnitee shall include therein or therewith such documentation and
information as is reasonably available to Indemnitee and is reasonably
necessary to determine whether and to what extent Indemnitee is entitled to
indemnification. The Secretary of the Company shall promptly advise the Board
in writing that Indemnitee has requested indemnification.
6.02 D&O INSURANCE. If, at the time of the receipt of such notice,
the Company has D&O Insurance in effect, the Company shall give prompt notice
of the commencement of such Proceeding to the insurers in accordance with the
procedures set forth in the respective policies in favor of Indemnitee. The
Company shall thereafter take all necessary or desirable action to cause such
insurers to pay, on behalf of Indemnitee, all Losses and Expenses payable as a
result of such Proceeding in accordance with the terms of such policies.
6.03 EMPLOYMENT OF COUNSEL. To the extent the Company does not, at
the time of the commencement of or the threat of commencement of a Proceeding,
have applicable D&O Insurance, or if a Determination is made that any Expenses
arising out of such Proceeding will not be payable under the D&O Insurance then
in effect, the Company shall be obligated to pay the Expenses of any such
Proceeding in advance of the final disposition thereof as provided in Article V
and the Company, if appropriate, shall be entitled to assume the defense of
such Proceeding, with counsel satisfactory to Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, the Company will not be liable to Indemnitee under this Agreement for
any legal or other Expenses subsequently incurred by Indemnitee in connection
with such defense other than reasonable Expenses of investigation provided that
Indemnitee shall have the right to employ its counsel in any such Proceeding
but the fees and expenses of such counsel incurred after delivery of notice
from the Company of its assumption of such defense shall be at Indemnitee's
expense and provided further that if (i) the employment of counsel by
Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall
have reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense or (iii) the Company
shall not, in fact, have employed counsel to assume the defense of such
Proceeding, the fees and expenses of counsel shall be at the expense of the
Company.
6.04 PAYMENT. All payments on account of the Company's
indemnification obligations under this Agreement shall be made within sixty
(60) days of Indemnitee's written request
-5-
<PAGE> 6
therefor unless a Determination is made that the claims giving rise to
Indemnitee's request are Excluded Claims or otherwise not payable under this
Agreement.
6.05 REIMBURSEMENT BY INDEMNITEE. Indemnitee agrees that he will
reimburse the Company for all Losses and Expenses paid by the Company in
connection with any Proceeding against Indemnitee in the event and only to the
extent that a Determination shall have been made by a court in a final
adjudication from which there is no further right of appeal that Indemnitee is
not entitled to be indemnified by the Company for such Expenses because the
claim is an Excluded Claim or because Indemnitee is otherwise not entitled to
payment under this Agreement.
6.06 COOPERATION. Indemnitee shall cooperate with the person,
persons or entity making the Determination with respect to Indemnitee's
entitlement to indemnification under this Agreement, including providing to
such person, persons or entity upon reasonable advance request any
documentation or information which is not privileged or otherwise protected
from disclosure and which is reasonably available to Indemnitee and reasonably
necessary to such Determination. Any costs or Expenses (including attorneys'
fees and disbursements) incurred by Indemnitee in so cooperating with the
person, persons or entity making such Determination shall be borne by the
Company (irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
ARTICLE VII - SETTLEMENT
The Company shall have no obligation to indemnify Indemnitee under
this Agreement for any amounts paid in settlement of any Proceeding effected
without the Company's prior written consent. The Company shall not settle any
claim in any manner which would impose any Fine or other obligation on
Indemnitee without Indemnitee's written consent. Neither the Company nor
Indemnitee shall unreasonably withhold their consent to any proposed
settlement.
ARTICLE VIII - RIGHTS NOT EXCLUSIVE
The rights provided hereunder shall not be deemed exclusive of any
other rights to which Indemnitee may be entitled under any bylaw, agreement,
vote of stockholders or of Disinterested Directors or otherwise, both as to
action in his or her official capacity and as to action in any other capacity
by holding such office, and shall continue after Indemnitee ceases to serve the
Corporation as a director or officer.
ARTICLE IX - ENFORCEMENT
9.01 BURDEN OF PROOF. Indemnitee's right to indemnification shall
be enforceable by Indemnitee only in the state courts of the State of Delaware
and shall be enforceable notwithstanding any adverse Determination. In any
such action, if a prior adverse Determination has been made, the burden of
proving that indemnification is required under this Agreement shall be on
Indemnitee. The Company shall have the burden of proving that indemnification
is not required under this Agreement if no prior adverse Determination shall
have been made.
-6-
<PAGE> 7
9.02 COSTS AND EXPENSES. In the event that any action is
instituted by Indemnitee under this Agreement, or to enforce or interpret any
of the terms of this Agreement, Indemnitee shall be entitled to be paid all
court costs and expenses, including reasonable counsel fees, incurred by
Indemnitee with respect to such action, unless the court determines that each
of the material assertions made by Indemnitee as a basis for such action were
not made in Good Faith or were frivolous.
ARTICLE X - GENERAL PROVISIONS
10.01 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
the Company and its successors and assigns and shall inure to the benefit of
Indemnitee and Indemnitee's heirs, executors and administrators.
10.02 SEVERABILITY. If any provision or provisions of this
Agreement is determined by a court to be invalid, illegal or unenforceable for
any reason whatsoever, such provision shall be limited or modified in its
application to the minimum extent necessary to avoid a violation of law, and,
as so limited or modified, such provision and the balance of this Agreement
shall be enforceable in accordance with its terms.
10.03 IDENTICAL COUNTERPARTS. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
10.04 HEADINGS. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
10.05 MODIFICATION AND WAIVER. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
10.06 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given it (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed.
If to Indemnitee to: As shown with Indemnitee's signature below
If to the Company to: Q.E.P. Co., Inc.
990 South Rogers Circle
Boca Raton, Florida 33487
Attention: Lewis Gould, President
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<PAGE> 8
or to such other address as may have been furnished to Indemnitee by the
Company or to the Company by Indemnitee, as the case may be.
10.07 GOVERNING LAW. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.
10.08 CONSENT TO JURISDICTION. The Company and Indemnitee each
hereby irrevocably consent to the jurisdiction of the courts of the State of
Delaware for all purposes in connection with any Proceeding which arises out of
or relates to this Agreement, and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
10.09 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding between the parties hereto in reference to all the
matters herein agreed upon. This Agreement replaces in full all prior
indemnification agreements or understandings of the parties hereto, and any and
all such prior agreements or understandings are hereby rescinded by mutual
agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
Q.E.P. CO., INC.,
a Delaware corporation
By:____________________________________
Name:__________________________________
Title:_________________________________
INDEMNITEE
_______________________________________
Address:
__________________________
__________________________
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<PAGE> 1
EXHIBIT 4.1
(QEP Logo)
Number Shares
Q.E.P. CO., INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
CUSIP 74727K 10 2
THIS CERTIFIES THAT __________________________________________ IS THE
OWNER OF ___________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE $.001 PER SHARE, OF
Q.E.P. CO., INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are issued and
shall be held subject to all of the provisions of the Certificate of
Incorporation of the Corporation and Bylaws of the Corporation and all
amendments thereto, to all of which the owner by the acceptance hereof assents.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed in facsimile by its duly authorized officers.
DATED:___________________________, 19_____
Q.E.P. CO., INC.
(SEAL)
By:__________________________
Lewis Gould, President
By:__________________________
Susan J. Gould, Secretary
COUNTERSIGNED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596
Denver, Colorado 80201
By:___________________________________________
Transfer Agent Authorized Signature
<PAGE> 2
Q.E.P. CO., INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ___________ Custodian ____________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _____________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________________ hereby sell, assign
and transfer unto Please insert Social Security or other identifying number of
assignee _____________________________________________________________________
______________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
______________________________________________________________________________
Shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ___________________________________________
Attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated: _____________________, 19____
<TABLE>
<S> <C>
_______________________________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
</TABLE>
Signature(s) Guaranteed:
_______________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
THE CORPORATION IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS. THE
CORPORATION WILL FURNISH UPON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OF
THE DESIGNATIONS, PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF THE SHARES
OF EACH CLASS AUTHORIZED TO BE ISSUED AND THE VARIATIONS IN RELATIVE RIGHTS AND
PREFERENCES BETWEEN THE SHARES OF EACH SERIES OF PREFERRED CLASS, SO FAR AS THE
SAME HAVE BEEN FIXED AND DETERMINED, AND THE AUTHORITY OF THE BOARD OF
DIRECTORS TO FIX AND DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF
SUBSEQUENT SERIES.
<PAGE> 1
EXHIBIT 4.1.1
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
August ___, 1996 is made and entered into by and between Q.E.P. CO., INC., a
Delaware corporation (the "Company") and CRUTTENDEN ROTH INCORPORATED (the
"Warrantholder").
The Company agrees to issue and sell, and the Warrantholder agrees to
purchase, for an aggregate purchase price of $________, warrants, as
hereinafter described (the "Warrants"), subject to adjustment pursuant to the
terms hereof, to purchase shares (the "Shares") of the Company's Common Stock,
$.001 par value (the "Common Stock"), in connection with a public offering (the
"Public Offering") by the Company of 1,200,000 shares of Common Stock pursuant
to an underwriting agreement (the "Underwriting Agreement"), dated as of August
___, 1996 between the Company and the Warrantholder as Representative of the
several underwriters named in the Underwriting Agreement (the "Underwriters").
The purchase and sale of the Warrants shall occur on the Closing Date, as
defined in the Underwriting Agreement, and be subject to the conditions to the
Underwriters' obligations to purchase Common Stock thereunder.
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and the Warrantholder, for value received, hereby agree
as follows:
Section 1. TRANSFERABILITY AND FORM OF WARRANTS.
1.1 Registration. The Warrants shall be numbered and
shall be registered on the books of the Company when issued.
1.2 Transfer. The Warrants shall be transferable in
whole or in part only on the books of the Company maintained at its principal
office in Boca Raton, Florida, or wherever its principal office may then be
located, upon delivery thereof duly endorsed by the Warrantholder or by its
duly authorized attorney or representative, accompanied by proper evidence of
succession, assignment or authority to transfer. Upon any registration of
transfer, the Company shall execute and deliver new Warrants to the person or
persons entitled thereto.
1.3 Limitations on Transfer of the Warrants. Subject to
the provisions of Section 11, the Warrants shall not be sold, transferred,
assigned or hypothecated by the Warrantholder for a period of one year from
August ___, 1996, except to (i) Underwriters, selling group members in the
Public Offering, and their officers or partners, (ii) one or more persons, each
of whom on the date of transfer is an officer or partner of the Warrantholder;
(iii) a general partnership or general partnerships, the general partners of
which are the Warrantholder and one or more persons, each of whom on the date
of transfer is an officer or partner of the Warrantholder; (iv) a successor to
the Warrantholder in merger or consolidation; (iv) a purchaser of all or
substantially all of the Warrantholder's assets; or (iv) any person receiving
the Warrants from one or more of the persons listed in this subsection 1.3 at
such person's or persons' death pursuant to a will or trust or the laws of
intestate succession. The Warrants may be divided or combined, upon request to
the Company by the Warrantholder, into a certificate or certificates
representing the right to purchase the same aggregate number of Shares. Unless
the context indicates otherwise, the term "Warrantholder" shall include any
transferee or transferees of the Warrants pursuant to this subsection 1.3, and
the term "Warrants" shall include any and all warrants outstanding pursuant to
this Agreement, including those evidenced by a certificate or certificates
issued upon division, exchange, substitution or transfer pursuant to this
Agreement.
1.4 Form of Warrants. The text of the Warrants and of
the form of election to purchase Shares shall be substantially as set forth in
Exhibit A attached hereto. The number of Shares issuable upon exercise of the
Warrants is subject to adjustment upon the occurrence of certain events, all as
hereinafter provided. The
1
<PAGE> 2
Warrants shall be executed on behalf of the Company by its President or by a
Vice President, and attested to by its Secretary or an Assistant Secretary. A
Warrant bearing the signature of an individual who was at the time of signature
the proper officer of the Company shall bind the Company, notwithstanding that
such individual shall have ceased to hold such office prior to the delivery of
such Warrant or did not hold such office on the date of this Agreement.
The Warrants shall be dated as of the date of signature
thereof by the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
1.5 Legend on Shares. Each Warrant certificate and
certificate for Shares initially issued upon exercise of the Warrants shall
bear the following legend, unless, at the time of exercise, such Shares are
subject to a currently effective Registration Statement under the Act:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED
OR TRANSFERRED IN ANY MANNER EXCEPT PURSUANT TO A REGISTRATION
OR AN EXEMPTION FROM SUCH REGISTRATION AND IN COMPLIANCE WITH
SECTION 11 OF THE AGREEMENT PURSUANT TO WHICH THEY WERE
ISSUED."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act of 1933, as amended (the "Act"), of the securities
represented thereby) shall also bear the above legend unless, in the opinion of
the Company's counsel, the securities represented thereby need no longer be
subject to such restrictions.
Section 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate
may be exchanged for another certificate or certificates entitling a
Warrantholder to purchase a like aggregate number of Shares as the certificate
or certificates surrendered then entitled such Warrantholder to purchase. Any
Warrantholder desiring to exchange a Warrant certificate shall make such
request in writing delivered to the Company, and shall surrender, properly
endorsed, with signatures guaranteed, the certificate evidencing the Warrant to
be so exchanged. Thereupon, the Company shall execute and deliver to the
person or persons entitled thereto a new Warrant certificate as so requested.
Section 3. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) Subject to the terms of this Agreement, a
Warrantholder shall have the right, at any time during the period commencing at
9:00 a.m., Pacific Time, on August ___, 1997 and ending at 5:00 p.m., Pacific
Time, on August ___, 2001 (the "Termination Date"), to purchase from the
Company up to the number of fully paid and nonassessable Shares to which such
Warrantholder may at the time be entitled to purchase pursuant to this
Agreement, upon surrender to the Company, at its principal office, of the
certificate evidencing the Warrants to be exercised, together with the purchase
form on the reverse thereof duly filled in and signed, with signatures
guaranteed, and upon payment to the Company of the Warrant Price (as defined in
and determined in accordance with the provisions of this Section 3 and Sections
7 and 8 hereof), for the number of Shares in respect of which such Warrants are
then exercised.
(b) Payment of the aggregate Warrant Price shall be made
in cash, by check, or any combination thereof, or by delivering for
cancellation securities of the Company in accordance with Section 3(c) below.
Upon such surrender of the Warrants and payment of such Warrant Price as
aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Warrantholder and in
such name or names as the Warrantholder may designate a certificate or
certificates for the number of full Shares
2
<PAGE> 3
so purchased upon the exercise of the Warrant, together with cash, as provided
in Section 9 hereof, in respect of any fractional Shares otherwise issuable
upon such surrender. Such certificate or certificates shall be deemed to have
been issued and any person so designated to be named therein shall be deemed to
have become a holder of record of such securities as of the date of surrender
of the Warrants and payment of the Warrant Price, as aforesaid, notwithstanding
that the certificate or certificates representing such securities shall not
actually have been delivered or that the stock transfer books of the Company
shall then be closed. The Warrants shall be exercisable, at the election of a
Warrantholder, either in full or from time to time in part and, in the event
that a certificate evidencing the Warrants is exercised in respect of less than
all of the Shares specified therein at any time prior to the Termination Date,
a new certificate evidencing the remaining portion of the Warrants will be
issued by the Company.
(c) The Warrantholder may elect to make payment of the
exercise price, or any portion thereof, by delivering for cancellation
securities of the Company (including the unexercised portion of this Warrant as
provided below) outstanding prior to the exercise of this Warrant, with such
securities to be credited toward such exercise price at the fair market value
(as determined below) of the securities, in which event the certificates
evidencing the securities delivered shall accompany the notice of exercise and
shall be duly endorsed or accompanied by duly executed stock powers to transfer
the same to the Company; provided, however, that such payment in securities
instead of cash or check shall not be effective and shall be rejected by the
Company if the Company is then prohibited by applicable law from purchasing or
acquiring the tendered securities. With respect to use of the Warrant as the
exercise price therefor, without any cash payment made by the Warrantholder,
the Warrantholder shall receive the number of Shares by net exercise, in lieu
of shares for which exercise is otherwise made, as determined as follows:
A = B(C-D) Where,
------
C
A = The net exercise number of shares
of Warrant Stock to be issued to
the Warrantholder.
B = The number of shares of Warrant
Stock otherwise desired by
Warrantholder to be purchased by
such exercise of this Warrant (at
the date of such calculation).
C = The fair market value of one share
of the Warrant Stock (at the date of
such calculation).
D = Exercise Price (as adjusted to the
date of such calculation).
If the Company rejects the payment in securities, the
tendered notice of exercise shall not be effective hereunder unless promptly
after being notified of such rejection the Warrantholder pays the purchase
price in cash. For purposes of this Section 3(c), the fair market value of
securities delivered upon exercise of the Warrant shall equal the Current
Market Price as defined in Section 9 below.
Section 4. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes, if any, attributable to the initial issuance of the Warrants or
the securities comprising the Shares; provided, however, the Company shall not
be required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the securities comprising the Shares.
3
<PAGE> 4
Section 5. MUTILATED OR MISSING WARRANTS. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest,
but only upon receipt of evidence satisfactory to the Company of such loss,
theft or destruction of such Warrant and a bond of indemnity, if requested,
also satisfactory in form and amount at the applicant's cost. Applicants for
such substitute Warrant certificates shall also comply with such other
reasonable regulations and pay such other reasonable charges as the Company may
prescribe.
Section 6. RESERVATION OF SHARES. There has been reserved, and the
Company shall at all times keep reserved so long as the Warrants remain
outstanding, out of its authorized Common Stock, such number of shares of
Common Stock as shall be subject to purchase under the Warrants. Every
transfer agent for the Common Stock and other securities of the Company
issuable upon the exercise of the Warrants will be irrevocably authorized and
directed at all times to reserve such number of authorized shares and other
securities as shall be requisite for such purpose. The Company will keep a
copy of this Agreement on file with every transfer agent for the Common Stock
and other securities of the Company issuable upon the exercise of the Warrants.
The Company will supply every such transfer agent with duly executed stock and
other certificates, as appropriate, for such purpose and will provide or
otherwise make available any cash which may be payable as provided in Section 9
hereof.
Section 7. WARRANT PRICE. The price per Share at which Shares shall
be purchasable upon the exercise of the Warrants (the "Warrant Price") shall be
$_____, subject to further adjustment pursuant to Section 8 hereof.
Section 8. ADJUSTMENT OF NUMBER OF SHARES. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant Price
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
8.1 Adjustments. The number of Shares purchasable upon
the exercise of the Warrants shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in
Common Stock or make a distribution in Common Stock, (ii) subdivide its
outstanding Common Stock, (iii) combine its outstanding Common Stock into a
smaller number of shares of Common Stock, or (iv) issue by reclassification of
its Common Stock other securities of the Company, the number of Shares
purchasable upon exercise of the Warrants immediately prior thereto shall be
adjusted so that the Warrantholder shall be entitled to receive the kind and
number of Shares or other securities of the Company which it would have owned
or would have been entitled to receive immediately after the happening of any
of the events described above, had the Warrants been exercised immediately
prior to the happening of such event or any record date with respect thereto.
Any adjustment made pursuant to this subsection 8.1(a) shall become effective
immediately after the effective date of such event.
(b) In case the Company shall issue rights, options,
warrants or convertible securities to all or substantially all holders of its
Common Stock, without any charge to such holders, entitling them to subscribe
for or purchase Common Stock at a price per share which is lower at the record
date mentioned below than the then Current Market Price (as defined in Section
9), the number of Shares thereafter purchasable upon the exercise of each
Warrant shall be determined by multiplying the number of Shares theretofore
purchasable upon exercise of the Warrant by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding immediately prior to
the issuance of such rights, options, warrants or convertible securities plus
the number of additional shares of Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of shares of Common
Stock outstanding immediately prior to the issuance of such rights, options,
warrants or convertible securities plus the number of shares which the
aggregate purchase price of the total number of shares issued would purchase at
such Current Market Price. Such adjustment shall be made whenever such rights,
options, warrants or convertible securities are issued, and shall become
effective immediately upon issuance of such rights, options, warrants or
convertible securities.
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<PAGE> 5
(c) In case the Company shall distribute to all or
substantially all holders of its Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions out of earnings) or rights,
options, warrants or convertible securities containing the right to subscribe
for or purchase Common Stock (excluding those referred to in subsection 8.1(b)
above), then in each case the number of Shares thereafter purchasable upon the
exercise of the Warrants shall be determined by multiplying the number of
Shares theretofore purchasable upon exercise of the Warrants by a fraction, of
which the numerator shall be the then Current Market Price on the date of such
distribution, and of which the denominator shall be such Current Market Price
on such date minus the then fair value of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights,
options, warrants or convertible securities applicable to one share minus the
consideration received by the Company therefor (determined as provided in
subsection (d) below). Such adjustment shall be made whenever any such
distribution is made and shall become effective on the date of distribution.
(d) For the purposes of the adjustments covered by
subsections 8.1(b) or (c) hereof, the Common Stock which the holders of any
rights, options, warrants or convertible securities shall be entitled to
subscribe for or purchase shall be deemed issued and outstanding as of the date
of such sale or issuance and the consideration received by the Company
therefor shall be deemed to be the consideration received by the Company for
such rights, options, warrants or convertible securities, plus the
consideration or premiums stated in such rights, options, warrants or
convertible securities to be paid for the Common Stock covered thereby. In
case the Company shall sell or issue Common Stock or rights, options, warrants
or convertible securities containing the right to subscribe for or purchase
Common Stock for a consideration consisting, in whole or in part, of property
other than cash or its equivalent, then in determining the "price per share" of
Common Stock and the "consideration received by the Company" for purposes of
the first sentence of this subsection 8.1(d), the Board of Directors shall
determine the fair value of said property, and such determination, if
reasonable and based upon the Board of Directors' good faith business judgment,
shall be binding upon the Warrantholder. In determining the "price per share"
of Common Stock, any underwriting discounts or commissions shall not be
deducted from the price received by the Company for sales of securities
registered under the Act.
(e) No adjustment in the number of Shares purchasable
pursuant to the Warrants shall be required unless such adjustment would require
an increase or decrease of at least one percent in the number of Shares then
purchasable upon the exercise of the Warrants or, if the Warrants are not then
exercisable, the number of Shares purchasable upon the exercise of the Warrants
on the first date thereafter that the Warrants become exercisable; provided,
however, that any adjustments which by reason of this subsection 8.1(e) are not
required to be made immediately shall be carried forward and taken into account
in any subsequent adjustment.
(f) Whenever the number of Shares purchasable upon the
exercise of the Warrant is adjusted, as herein provided, the Warrant Price
payable upon exercise of the Warrant shall be adjusted by multiplying such
Warrant Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator
shall be the number of Shares so purchasable immediately thereafter.
(g) Whenever the number of Shares purchasable upon the
exercise of the Warrants is adjusted as herein provided, the Company shall
cause to be promptly mailed to the Warrantholder by first class mail, postage
prepaid, notice of such adjustment and a certificate of the chief financial
officer of the Company setting forth the number of Shares purchasable upon the
exercise of the Warrants and the Warrant Price after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
(h) For the purpose of this subsection 8.1, the term
"Common Stock" shall mean (i) the class of stock designated as the Common Stock
of the Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value,
or from no par value to par value. In the event that at any time, as a result
of an adjustment made pursuant to this Section 8, the Warrantholder shall
become entitled to purchase any securities of the Company other than Common
Stock, (i) if the Warrantholder's right to purchase is on any other basis than
that available to all holders of the Company's Common Stock, the Company shall
obtain an opinion of
5
<PAGE> 6
an independent investment banking firm valuing such other securities and (ii)
thereafter the number of such other securities so purchasable upon exercise of
the Warrants shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the Shares contained in this Section 8.
(i) Upon the expiration of any rights, options, warrants
or conversion privileges, if such shall not have been exercised, the number of
Shares purchasable upon exercise of the Warrants, to the extent the Warrants
have not then been exercised, shall, upon such expiration, be readjusted and
shall thereafter be such as they would have been had they been originally
adjusted (or had the original adjustment not been required, as the case may be)
on the basis of (A) the fact that the only shares of Common Stock so issued
were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options, warrants or conversion privileges, and (B)
the fact that such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise plus the
consideration, if any, actually received by the Company for the issuance, sale
or grant of all such rights, options, warrants or conversion privileges whether
or not exercised; provided, however, that no such readjustment shall have the
effect of decreasing the number of Shares purchasable upon exercise of the
Warrants by an amount in excess of the amount of the adjustment initially made
in respect of the issuance, sale or grant of such rights, options, warrants or
conversion privileges.
8.2 No Adjustment for Dividends. Except as provided in
subsection 8.1, no adjustment in respect of any dividends or distributions out
of earnings shall be made during the term of the Warrants or upon the exercise
of the Warrants.
8.3 No Adjustment in Certain Cases. No adjustments shall
be made pursuant to Section 8 hereof in connection with the issuance of the
Common Stock sold as part of the public sale pursuant to the Underwriting
Agreement or the issuance of Shares upon exercise of the Warrants.
8.4 Preservation of Purchase Rights upon
Reclassification, Consolidation, etc. In case of any consolidation of the
Company with or merger of the Company into another corporation or in case of
any sale or conveyance to another corporation of the property, assets or
business of the Company as an entirety or substantially as an entirety, the
Company or such successor or purchasing corporation, as the case may be, shall
execute with the Warrantholder an agreement that the Warrantholder shall have
the right thereafter upon payment of the Warrant Price in effect immediately
prior to such action to purchase, upon exercise of the Warrants, the kind and
amount of shares and other securities and property which it would have owned or
have been entitled to receive after the happening of such consolidation,
merger, sale or conveyance had the Warrants been exercised immediately prior to
such action. In the event of a merger described in Section 368(a)(2)(E) of the
Internal Revenue Code of 1986, in which the Company is the surviving
corporation, the right to purchase Shares under the Warrants shall terminate on
the date of such merger and thereupon the Warrants shall become null and void,
but only if the controlling corporation shall agree to substitute for the
Warrants its warrant which entitles the holder thereof to purchase upon its
exercise the kind and amount of shares and other securities and property which
it would have owned or been entitled to receive had the Warrants been exercised
immediately prior to such merger. Any such agreements referred to in this
subsection 8.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 8
hereof. The provisions of this subsection 8.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
8.5 Par Value of Shares of Common Stock. Before taking
any action which would cause an adjustment effectively reducing the portion of
the Warrant Price allocable to each Share below the then par value (if any) per
share of the Common Stock issuable upon exercise of the Warrants, the Company
will take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid
and nonassessable Common Stock upon exercise of the Warrants.
8.6 Independent Public Accountants. The Company may
retain a firm of independent public accountants of recognized national standing
(which may be any such firm regularly employed by the Company) to
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<PAGE> 7
make any computation required under this Section 8, and a certificate signed by
such firm shall be conclusive evidence of the correctness of any computation
made under this Section 8.
8.7 Statement on Warrant Certificates. Irrespective of
any adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement. However, the Company may, at
any time in its sole discretion (which shall be conclusive), make any change in
the form of Warrant certificate that it may deem appropriate and that does not
affect the substance thereof; and any Warrant certificate thereafter issued,
whether upon registration of transfer of, or in exchange or substitution for,
an outstanding Warrant certificate, may be in the form so changed.
Section 9. FRACTIONAL INTERESTS; CURRENT MARKET PRICE. The Company
shall not be required to issue fractional Shares on the exercise of the
Warrants. If any fraction of a Share would, except for the provisions of this
Section 9, be issuable on the exercise of the Warrants (or specified portion
thereof), the Company shall pay an amount in cash equal to the then Current
Market Price multiplied by such fraction. For purposes of this Agreement, the
term "Current Market Price" shall mean (i) if the Common Stock is traded in the
over-the-counter market and not in The Nasdaq Stock Market nor on any national
securities exchange, the average of the per share closing bid prices of the
Common Stock on the 30 consecutive trading days immediately preceding the date
in question, as reported by Nasdaq or an equivalent generally accepted
reporting service, or (ii) if the Common Stock is traded in The Nasdaq Stock
Market or on a national securities exchange, the average for the 30 consecutive
trading days immediately preceding the date in question of the daily per share
closing prices of the Common Stock in The Nasdaq Stock Market or on the
principal stock exchange on which it is listed, as the case may be. For
purposes of clause (i) above, if trading in the Common Stock is not reported by
Nasdaq, the bid price referred to in said clause shall be the lowest bid price
as reported in the "pink sheets" published by National Quotation Bureau,
Incorporated. The closing price referred to in clause (ii) above shall be the
last reported sale price or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices, in either case
in The Nasdaq Stock Market or on the national securities exchange on which the
Common Stock is then listed.
Section 10. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER.
Nothing contained in this Agreement or in the Warrants shall be construed as
conferring upon the Warrantholder or its transferees any rights as a
stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect of any meeting of
stockholders for the election of directors of the Company or any other matter.
If, however, at any time prior to the expiration of the Warrants and prior to
their exercise, any one or more of the following events shall occur:
(a) any action which would require an adjustment pursuant
to Section 8.1 (except subsection 8.1(h)) or 8.4; or
(b) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation, merger or sale
of its property, assets and business as an entirety or substantially
as an entirety) shall be proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 14 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
stockholders entitled to vote on such proposed dissolution, liquidation or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to mail or receive such notice
or any defect therein shall not affect the validity of any action taken with
respect thereto.
7
<PAGE> 8
Section 11. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
(a) The Warrantholder agrees that prior to making any
disposition of the Warrants or the Shares, other than to persons or entities
identified in clauses (i) through (vi), inclusive, of Section 1.3, the
Warrantholder shall give written notice to the Company describing briefly the
manner in which any such proposed disposition is to be made; and no such
disposition shall be made if the Company has notified the Warrantholder that in
the opinion of counsel reasonably satisfactory to the Warrantholder a
registration statement or other notification or post-effective amendment
thereto (hereinafter collectively a "Registration Statement") under the Act is
required with respect to such disposition and no such Registration Statement
has been filed by the Company with, and declared effective, if necessary, by,
the Securities and Exchange Commission (the "Commission").
(b) The Company shall be obligated to the owners of the
Warrants and the Shares to file a Registration Statement as follows:
(i) Whenever during the four-year period beginning on
August ___, 1997 and ending on August ___, 2001 (but in no event later that
seven years from the effective date of the Public Offering), the Company
proposes to file with the Commission a Registration Statement (other than on
Form S-4 or as to securities issued pursuant to an employee benefit plan or a
transaction subject to Rule 145 promulgated under the Act), it shall, at least
30 days prior to each such filing, give written notice of such proposed filing
to the Warrantholder and each holder of Shares at their respective addresses as
they appear on the records of the Company, and shall offer to include and shall
include in such filing any proposed disposition of the Shares upon receipt by
the Company, not less than 10 days prior to the proposed filing date, of a
request therefor setting forth the facts with respect to such proposed
disposition and all other information with respect to such person reasonably
necessary to be included in such Registration Statement. In the event that the
managing underwriter for said offering advises the Company in writing that the
inclusion of such securities in the offering would be detrimental to the
offering, such securities shall nevertheless be included in the Registration
Statement, provided that the Warrantholder and each holder of Warrants and
Shares desiring to have their Shares included in the Registration Statement
agree in writing, for a period of 90 days following such offering, not to sell
or otherwise dispose of such Shares pursuant to such Registration Statement,
which Registration Statement the Company shall keep effective for a period of
at least nine months following the expiration of such 90-day period.
(ii) In addition to any Registration Statement pursuant to
subsection (i) above, during the four-year period beginning on August ___, 1997
and ending on August ___, 2001 (but in no event later than five years from the
effective date of the Public Offering), the Company will, as promptly as
practicable (but in any event within 60 days), after written request (the
"Request") by Cruttenden Roth Incorporated, or by a person or persons holding
(or having the right to acquire by virtue of holding the Warrants) at least 50%
of the shares of Common Stock which have been (or may be) issued upon exercise
of the Warrants, prepare and file at its own expense one Registration Statement
with the Commission and appropriate Blue Sky authorities sufficient to permit
the public offering of the Shares and will use its best efforts at its own
expense through its officers, directors, auditors and counsel, in all matters
necessary or advisable, to cause such Registration Statement to become
effective as promptly as practicable and to maintain such effectiveness so as
to permit resale of the Shares covered by the Request until the earlier of the
time that all such Shares have been sold or the expiration of ninety (90) days
from the effective date of the Registration Statement (the "Minimum Period");
provided, however, that the Company shall only be obligated to file at its own
expense and have declared effective one such Registration Statement under this
Section 11(b)(ii). If a Registration Statement is filed pursuant to this
Section 11(b)(ii) but not declared effective, or is not kept effective for the
Minimum Period, then it shall not be deemed to be a Registration Statement
meeting the requirements hereunder.
(c) All fees, disbursements and out-of-pocket expenses
(other than Warrantholder's brokerage fees and commissions and legal fees of
counsel to the Warrantholder, if any) in connection with the filing of any
Registration Statement under Section 11(b) (or obtaining the opinion of counsel
and any no-action position of the Commission with respect to sales under Rule
144) and in complying with applicable securities and Blue Sky laws shall be
borne by the Company. The Company at its expense will supply any Warrantholder
and any holder of
8
<PAGE> 9
Shares with copies of such Registration Statement and the prospectus included
therein and other related documents and any opinions and no-action letters in
such quantities as may be reasonably requested by the Warrantholder or holder
of Shares.
(d) The Company shall not be required by this Section 11
to file such Registration Statement if, in the opinion of counsel for the
Warrantholder and holders of Shares and the Company (or, should they not agree,
in the opinion of another counsel experienced in securities law matters
acceptable to counsel for such holders and the Company), the proposed public
offering or other transfer as to which such Registration Statement is requested
is exempt from applicable federal and state securities laws and would result in
all purchasers or transferees obtaining securities which are not "restricted
securities," as defined in Rule 144 under the Act.
(e) The provisions of this Section 11 and Section 12
hereof shall apply to the extent as provided herein if the Company chooses to
file an Offering Statement under Regulation A promulgated under the Act.
(f) The Company agrees that until all Shares have been
sold under a Registration Statement or pursuant to Rule 144 under the Act, it
will keep current in filing all materials required to be filed with the
Commission in order to permit the holders of such securities to sell the same
under Rule 144.
Section 12. INDEMNIFICATION.
(a) In the event of the filing of any Registration
Statement with respect to the Shares pursuant to Section 11 hereof, the Company
agrees to indemnify and hold harmless the Warrantholder and any holder of such
Shares and each person, if any, who controls the Warrantholder or any holder of
such Shares within the meaning of the Act, against any losses, claims, damages
or liabilities, joint or several (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Warrantholder or any
holder of such Shares or such controlling person may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any such
Registration Statement, or any related preliminary prospectus, final
prospectus, or amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such Registration Statement, preliminary prospectus,
final prospectus or amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by such
Warrantholder or the holder of such Shares specifically for use in the
preparation thereof. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) The Warrantholder and the holders of the Shares agree
that they will, severally and not jointly, indemnify and hold harmless the
Company, each other person referred to in subparts (1), (2) and (3) of Section
11(a) of the Act in respect of the Registration Statement and each person, if
any, who controls the Company within the meaning of the Act, against any
losses, claims, damages or liabilities (which shall, for all purposes of this
Agreement, include but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the Company or any such
director, officer or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in such Registration
Statement, or any related preliminary prospectus, final prospectus or amendment
or supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such Registration Statement,
preliminary prospectus, final prospectus or amendment or supplement thereto in
reliance upon, and in conformity with, written information furnished to the
Company by the Warrantholder or such holder of Shares specifically for
9
<PAGE> 10
use in the preparation thereof. This indemnity agreement will be in addition
to any liability which the Warrantholder or such holder of Shares may otherwise
have.
(c) Promptly after receipt by an indemnified party under
this Section 12 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 12, notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying party will
not relieve the indemnifying party from any liability which it may have to any
indemnified party. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified,
reasonably assume the defense thereof, subject to the provisions herein stated,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 12 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel
reasonably satisfactory to the indemnified party; provided that if the
indemnified party is a Warrantholder or a holder of Shares or a person who
controls a Warrantholder or a holder of Shares within the meaning of the Act,
the fees and expenses of such counsel shall be at the expense of the
indemnifying party if (i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party or (ii) the named parties to
any such action, including any impleaded parties, include both a Warrantholder
or a holder of Shares or such controlling person and the indemnifying party and
a Warrantholder or a holder of Shares or such controlling person shall have
been advised by such counsel that there may be one or more legal defenses
available to a Warrantholder or a holder of Shares or controlling person which
are not available to or in conflict with any legal defenses which may be
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of a
Warrantholder or a holder of Shares or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for the Warrantholder, the holders of the Shares and
controlling persons, which firm shall be designated in writing by a majority in
interest of such holders and controlling persons based upon the value of the
securities included in the Registration Statement). No settlement of any
action against an indemnified party shall be made without the consent of the
indemnified and the indemnifying parties, which shall not be unreasonably
withheld in light of all factors of importance to such parties.
Section 13. CONTRIBUTION. In order to provide for just and
equitable contribution under the Act in any case in which (i) a Warrantholder
or any holder of the Shares or controlling person makes a claim for
indemnification pursuant to Section 12 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 12 hereof
provide for indemnification in such case or (ii) contribution under the Act may
be required on the part of any Warrantholder or any holder of the Shares or
controlling person, then the Company and any Warrantholder or any such holder
of the Shares or controlling person shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees), in either such case (after
contribution from others) on the basis of relative fault as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
a Warrantholder or holder of Shares or controlling person on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and such holders of
such securities and such controlling persons agree that it would not be just
and equitable if contribution pursuant to this Section 13 were determined by
pro rata allocation or by any other method which does
10
<PAGE> 11
not take account of the equitable considerations referred to in this Section
13. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section 13 shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Section 14. NOTICES. Any notice pursuant to this Agreement by
the Company or by a Warrantholder or a holder of Shares shall be in writing and
shall be deemed to have been duly given on the date of delivery or refusal
indicated on the return receipt if delivered or mailed by certified mail,
return receipt requested:
(a) If to a Warrantholder or a holder of Shares,
addressed to Cruttenden Roth Incorporated, 18301 Von Karman, Suite
100, Irvine, California, Attention: Corporate Finance Department.
(b) If to the Company addressed to it at 990 South Rogers
Circle, Boca Raton, Florida, 33487, Attention: President.
Each party may from time to time change the address to which notices to it are
to be delivered or mailed hereunder by notice in accordance herewith to the
other party.
Section 15. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company, the Warrantholder, or the
holders of Shares shall bind and inure to the benefit of their respective
successors and assigns hereunder.
Section 16. MERGER OR CONSOLIDATION OF THE COMPANY. The Company
will not merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of Section 8.4 are complied with.
Section 17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
statements contained in any schedule, exhibit, certificate or other instrument
delivered by or on behalf of the parties hereto, or in connection with the
transactions contemplated by this Agreement, shall be deemed to be
representations and warranties hereunder. Notwithstanding any investigations
made by or on behalf of the parties to this Agreement, all representations,
warranties and agreements made by the parties to this Agreement or pursuant
hereto shall survive.
Section 18. APPLICABLE LAW. This Agreement shall be deemed to be
a contract made under the laws of the State of California and for all purposes
shall be construed in accordance with the laws of said State.
Section 19. BENEFITS OF THIS AGREEMENT. Nothing in this
Agreement shall be construed to give to any person or corporation other than
the Company, the Warrantholder and the holders of Shares any legal or equitable
right, remedy or claim under this Agreement. This Agreement shall be for the
sole and exclusive benefit of the Company, the Warrantholder and the holders of
Shares.
Section 20. AMENDMENTS. This Agreement may be amended only by a
written instrument executed by duly authorized representatives of the Company
and Cruttenden Roth Incorporated.
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<PAGE> 12
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
Q.E.P. CO., INC.,
a Delaware corporation
By:
----------------------------------
Name:
Title:
CRUTTENDEN ROTH INCORPORATED
By:
----------------------------------
Name:
Title:
12
<PAGE> 13
Exhibit A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT PURSUANT TO A
REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION AND IN COMPLIANCE
WITH SECTION 11 OF THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED.
Warrant Certificate No. 1
REPRESENTATIVE'S WARRANTS TO PURCHASE 120,000 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
PACIFIC TIME, ON AUGUST ___, 2001
Q.E.P. CO., INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, CRUTTENDEN ROTH INCORPORATED, the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from Q.E.P. CO., INC. (the "Company"), at any time during the period
commencing at 9:00 a.m., Pacific Time, on August ___, 1997, and before 5:00
p.m., Pacific Time, on August ___, 2001 at the purchase price per share of
$_____ (the "Warrant Price"), the number of Shares of Common Stock of the
Company set forth above (the "Shares"). The number of Shares issuable upon
exercise of each Warrant evidenced hereby and the Warrant Price shall be subject
to adjustment from time to time as set forth in the Representative's Warrant
Agreement, dated as of August ___, 1996, between the Company and Cruttenden Roth
Incorporated (the "Representative's Warrant Agreement").
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price at the principal office of the Company. Payment of
such price shall be made at the option of the Warrantholder in cash, by check,
or any combination thereof, or by delivering for cancellation securities of the
Company in accordance with the Representative's Warrant Agreement.
The Warrants evidenced hereby represent the right to purchase an aggregate
of up to One Hundred- Twenty Thousand (120,000) Shares, subject to certain
adjustments, and are issued under and in accordance with a Representative's
Warrant Agreement and are subject to the terms and provisions contained in the
Representative's Warrant Agreement, to all of which the Warrantholder by
acceptance hereof consents.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares of Common Stock as to which the Warrants evidenced hereby shall not
have been exercised. These Warrants may be exchanged at the office of the
Company by surrender of this Warrant Certificate properly endorsed for one or
more new Warrants of the same aggregate number of Shares of Common Stock as
evidenced by the Warrant or Warrants exchanged. No fractional Shares of Common
Stock will be issued upon the exercise of rights to purchase hereunder, but the
Company shall pay the cash value of any fraction upon the exercise of one or
more Warrants. These Warrants are transferable at the office of the Company in
the manner and subject to the limitations set forth in the Representative's
Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a stockholder of the Company.
Q.E.P. CO., INC.
By:
----------------------------------
Dated: August ___, 1996
ATTEST:
---------------------------------
A-1
<PAGE> 14
Q.E.P. CO., INC.
PURCHASE FORM
Q.E.P. CO., INC.
990 South Rogers Circle
Boca Raton, Florida 33487
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ____________ Shares of Common Stock (the "Shares") provided for
therein, and requests that certificates for the Shares be issued in the name
of:
-------------------------------------------
(Please Print or Type Name, Address and
Social Security Number)
-------------------------------------------
-------------------------------------------
and, if said number of Shares shall not be all the Shares purchasable
hereunder, that a new Warrant Certificate for the balance of the Shares
purchasable under the within Warrant Certificate be registered in the name of
the undersigned Warrantholder or its Assignee as below indicated and delivered
to the address stated below.
Dated:
--------------------------
Name of Warrantholder
or Assignee:
---------------------------------------------
(Please Print)
Address:
---------------------------------------------
---------------------------------------------
Signature:
---------------------------------------------
Note: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signatures Guaranteed:
-------------------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto the assignee named below all of the rights of the undersigned
represented by the attached Warrant with respect to the number of Shares
covered by the Warrant set forth below:
(Name and Address of Assignee Must Be Printed or Typewritten)
<TABLE>
<CAPTION>
Social Security No.
Name of Assignee or Tax I.D. No. Address No. of Shares
<S> <C> <C> <C>
- ------------------------------------ -------------------- -------------------------------- ----------------
--------------------------------
--------------------------------
</TABLE>
and does hereby irrevocably constitute and appoint _________________ Attorney
to transfer said Warrants on the books of the Company, with full power of
substitution in the premises.
Dated:
---------------------------- --------------------------
Signature of Registered
Holder
Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant Certificate in every
particular, without alteration or enlargement or any change whatever.
Signature Guaranteed:
-----------------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
<PAGE> 1
EXHIBIT 5
BERLINER ZISSER WALTER & GALLEGOS
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
ONE NORWEST CENTER
SUITE 4700
1700 LINCOLN STREET
DENVER, COLORADO 80203-4547
(303) 830-1700
FAX (303) 830-0863
August 5, 1996
Q.E.P. Co., Inc.
990 South Rogers Circle
Boca Raton, Florida 33487
Re: Registration Statement on Form S-1
(S.E.C. File No. 333-7477) Covering
Public Offering of 1,380,000 Shares
of Common Stock of Q.E.P. Co., Inc.
-----------------------------------
Gentlemen:
We have acted as counsel to Q.E.P Co., Inc., a Delaware corporation
(the "Company"), in connection with the proposed offering (i) by the Company to
the public of 1,180,000 shares of Common Stock, including 180,000 shares
subject to the over- allotment option (the "Common Stock"), and (ii) by certain
selling shareholders (the "Selling Shareholders") of 200,000 shares of Common
Stock (the "Shareholder Shares"), all in accordance with the registration
provisions of the Securities Act of 1933, as amended.
In such capacity, we have examined, among other documents, the
Registration Statement on Form S-1 (File No. 333-7477) filed by the Company
with the Securities and Exchange Commission (the "Commission") on July 2, 1996,
as amended by Amendment No. 1 which the Company is to file with the Commission
today or shortly hereafter (as the same may be further amended from time to
time, the "Registration Statement"), covering the public offering of the
above-described securities.
Based on the foregoing and on such further examination as we have
deemed relevant and necessary, we are of the opinion that:
1. The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware.
2. The shares of Common Stock have been legally and validly
authorized under the Articles of Incorporation of the Company, and on receipt
of the consideration required by, and when issued in accordance with the
description set forth in, the Registration Statement, the shares
<PAGE> 2
BERLINER ZISSER WALTER & GALLEGOS
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
Q.E.P. Co., Inc.
August 5, 1996
Page 2
of Common Stock will constitute duly and validly issued, outstanding, and fully
paid and nonassessable securities of the Company.
3. The Shareholder Shares are duly and validly issued,
outstanding, and fully paid and nonassessable securities of the Company.
We hereby consent to the use of our name and to the references to our
firm beneath the caption "LEGAL MATTERS" in the Prospectus forming a part of
the Registration Statement, and to the filing of a copy of this opinion as
Exhibit No. 5 thereto.
Very truly yours,
/s/ BERLINER ZISSER WALTER & GALLEGOS, P.C.
BERLINER ZISSER WALTER & GALLEGOS, P.C.
<PAGE> 1
EXHIBIT 9
VOTING TRUST AGREEMENT
AGREEMENT, made as of the 2nd day of August 1996, by and among Q.E.P.
Co.,Inc., a Delaware corporation having its principal place of business at 990
South Rogers Circle, Boca Raton, Florida 33487 (the "Company"), Susan Gould, an
individual residing at 4101 North Ocean Boulevard, Apartment 903D, Boca Raton,
Florida 33431 (the "Shareholder"), and Lewis Gould, an individual residing at
2916 South Ocean Boulevard, Townhouse 1, Highland Beach, Florida 33487 (the
"Trustee").
WITNESSETH:
WHEREAS, the Shareholder presently owns 514,152 shares (the "Existing
Shares") of common stock, no par value (the "Common Stock"), of the Company;
and
WHEREAS, the Shareholder presently contemplates and intends to sell,
pursuant to a public offering (the "Public Offering") registered under the
Securities Act of 1933, as amended (the "Act"), a total of 100,000 shares of
Common Stock (the "Public Offering Shares") which shall result in Shareholder
being the record and beneficial owner of 414,152 shares of Common Stock; and
WHEREAS, for purposes of this Agreement, the term "Shares" shall
include the 414,152 shares of Common Stock to be held of record and
beneficially immediately following the Public Offering, all Public Offering
Shares contemplated to be sold but not actually sold in the Public Offering,
and all other shares of the Common
<PAGE> 2
Stock hereafter acquired, of record or beneficially, by the Shareholder; and
WHEREAS, in order to secure continuity and stability of the Company's
policy and management for the benefit of the Company and all of its
shareholders, the Shareholder has agreed to enter into this Agreement pursuant
to which the Trustee will obtain voting control with respect to the Shares; and
WHEREAS, the Shareholder has agreed that the Trustee shall take and
hold for the period which is hereinafter stated the legal title to the Shares,
to be held by him and to act under the terms of this Agreement; and
WHEREAS, the Trustee has consented to act pursuant to this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants of the
parties which are hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged,
IT IS HEREBY AGREED:
1. Recitals. The parties hereby adopt as part of this Agreement each of
the recitals which are contained above in the WHEREAS clauses, and agree that
such recitals shall be binding upon the parties hereto by way of contract and
not merely by way of recital or inducement; and such clauses are hereby
confirmed and ratified as being accurate by each party as to itself, herself
and himself.
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<PAGE> 3
2. Transfer of Stock to Trustee and Acceptance by Trustee.
A. The Shareholder shall deposit with the Trustee
certificates evidencing the Shares. All certificates evidencing the Shares
shall be endorsed, or accompanied by such instruments of transfer (together
with any appropriate transfer tax stamps), as to enable the Trustee to cause
such certificates to be transferred into the name of the Trustee, as
hereinafter provided. Upon receipt by the Trustee of the any such Shares and
the transfer of same on the books of the Company into the name of the Trustee,
the Trustee shall hold same subject to the terms of this Agreement, and shall
thereupon issue and deliver to the Shareholder a voting trust certificate for
the Shares so deposited (hereinafter referred to as the "Voting Trust
Certificate"), which shall be substantially in the form annexed hereto as
Exhibit "A". B. All certificates for Shares to be transferred and
delivered to the Trustee pursuant to this Agreement shall be surrendered by the
Trustee to the Company and canceled, and a new certificate therefor shall be
issued to and held by the Trustee in the name of "Lewis Gould, as Voting
Trustee u/t/a dated August 2, 1996."
C. The Trustee hereby accepts the trust which is created
pursuant to this Agreement and covenants that he will faithfully discharge all
of his duties as such Trustee.
D. Copies of this Agreement, and of every agreement
amending or supplementing same, shall be placed on file in the principal office
of the Company, and shall be open to inspection by any shareholder of the
Company, during normal business hours.
3
<PAGE> 4
E. The Shareholder hereby represents, warrants and
covenants that the Existing Shares are the only capital stock of the Company
which are beneficially owned by the Shareholder as of the date hereof and that
if the Shareholder, at any time during the term of this Agreement, shall
acquire ownership of any additional capital stock of the Company, the
Shareholder shall deposit with the Trustee the certificates evidencing such
additional capital stock. The Shareholder further covenants that if, for any
reason, she does not sell all of the Public Offering Shares in the Public
Offering, the Shareholder shall deposit with the Trustee the certificates
evidencing such Public Offering Shares not sold in the Public Offering.
3. Transfer of Voting Trust Certificates and Shares.
A. Except as provided in Paragraphs "B" and "C" of this
Article "3" of this Agreement, during the term of this Agreement, no Voting
Trust Certificates or Shares shall be sold, transferred, assigned, pledged,
hypothecated or otherwise transferred (each, a "Transfer") by the Shareholder.
B. Notwithstanding the provisions of Paragraph "A" of
this Article "3" of this Agreement, sales of any or all of the Shares and/or
Transfers of any or all Voting Trust Certificates shall be permitted under this
Agreement only upon full compliance by the Shareholder with subparagraph "(X)"
of this Paragraph "B" of this Article "3 " of this Agreement, with respect to a
sale of the Shares, or subparagraph "(Y)" of this Paragraph "B" of this Article
"3" of this Agreement, with respect to a sale of Voting Trust
4
<PAGE> 5
Certificate(s), or subparagraph "(Z)" of this Paragraph "B" of this Article "3
" of this Agreement, with respect to a Transfer of a Voting Trust Certificate.
(X) If the Shareholder determines to sell any or all of the Shares
by means of a sale through a registered broker dealer (a "Sale"), the
Shareholder shall so notify the Trustee of such determination by a written
notice (a "Notice of Sale"), which Notice of Sale shall state the number of
Shares intended to be sold. Each Notice of Sale shall be deemed to be an offer
to sell the Shares subject to the Notice of Sale to Trustee, in his individual
capacity and not as Trustee (an "Offer to Trustee"), at a purchase price (the
"Purchase Price") equal to the fair market value of the Shares (without giving
effect to the restrictions imposed upon such Shares by this Agreement). For
purposes of this Agreement, "fair market value of the Shares" shall be equal to
the closing sale price (or average of the closing bid and closing asked prices)
of a share of Common Stock on the date the Notice of Sale shall be deemed given
under this Agreement multiplied by the number of Shares subject to the Notice
of Sale, In no event shall the number of Shares set forth in a Notice of Sale
exceed the number of Shares that Shareholder would, except for the provisions
of this Agreement, be permitted to sell pursuant to Rule 144 promulgated under
the Securities Act of 1933, as amended. Each Offer to Trustee shall remain
open for three (3) business days after receipt of the Notice of Sale. The
Trustee shall exercise such Offer to Trustee by giving the Shareholder written
notice of such exercise
5
<PAGE> 6
within said three (3) business day period and delivering to the Shareholder the
Purchase Price in the form of cash, certified check or other means of
immediately available funds. Upon payment of the Purchase Price by the
Trustee, the Shares subject to the Offer to Trustee shall be transferred into
the name of Trustee in his individual capacity on the stock transfer records of
the Company and such Shares shall no longer be subject to this Agreement. If
the Trustee shall fail to timely exercise the Offer to Trustee, then the
Trustee shall comply with all reasonable requests of Shareholder to cause the
Shares subject to the Notice of Sale to be transferred on the stock transfer
records of the Company into the name of the purchaser of such Shares (or into
the name of a registered broker or dealer designated by such purchaser) and
such Shares shall no longer be subject to this Agreement; provided, however,
that such Sale shall have been consummated within fifteen (15) days after the
giving of such Notice of Sale; and provided further, however, if such Sale
shall not have been consummated within said fifteen (15) days after the giving
of such Notice of Sale then the Shares subject to the Notice of Sale shall, in
all respects, be subject to the terms of this Agreement and Shareholder shall
not thereafter Transfer any Voting Trust Certificates and/or Shares without
again first complying with all of the terms of this Agreement applicable to
such Transfer.
(Y) If Shareholder determines to sell any or all of the Voting
Trust Certificates pursuant to a bona fide third party offer, Shareholder shall
so notify the Trustee of such
6
<PAGE> 7
determination by a written notice (a "Notice of Sale"), which Notice of Sale
shall state the number of Voting Trust Certificates intended to be sold, and
shall be accompanied by a copy of the agreement (the "Sale Agreement") pursuant
to which the Sale is intended to be consummated. Each Notice of Sale shall be
deemed to be an offer to sell the Voting Trust Certificates to Trustee, in his
individual capacity and not as Trustee (an "Offer to Trustee"), at a purchase
price (the "Purchase Price") equal to the price for the Shares as set forth in
the Sale Agreement. Each Offer to Trustee shall remain open for three (3)
business days after receipt of the Notice of Sale. The Trustee shall exercise
such Offer to Trustee by giving Shareholder written notice of such exercise
within said three (3) business day period and delivering to Shareholder the
Purchase Price in any of the manners and at such times as are permissible in
the Sale Agreement. Upon payment of the Purchase Price by the Trustee, the
Voting Trust Certificates subject to the offer to Trustee shall be transferred
into the name of Trustee in his individual capacity. If the Trustee shall fail
to timely exercise the Offer to Trustee, then the Trustee shall comply with all
reasonable requests of Shareholder to cause the Voting Trust Certificates
subject to the Notice of Sale to be transferred into the name of the purchaser
of such Voting Trust Certificates; provided, however, that such Sale shall be
consummated no later than the original closing date set forth in the Sale
Agreement and that each transferee of a Voting Trust Certificate hereunder
shall, by the acceptance thereof, become a
7
<PAGE> 8
party and subject to this Agreement with the same force and effect as if such
transferee had executed this Agreement, and shall be embraced within the
meaning of the term Shareholder whenever used herein, including the limited
ability to transfer any or all of the Voting Trust Certificates and/or the
Shares; and further provided, however, if such Sale shall not have been
consummated on or prior to the original closing date set forth in the Sale
Agreement, then, the Voting Trust Certificates subject to the Notice of Sale
shall, in all respects, be subject to the terms of this Agreement and
Shareholder shall not thereafter Transfer any Voting Trust Certificates and/or
Shares without again first complying with all of the terms of this Agreement
applicable to such Transfer.
(Z) If the Shareholder determines to Transfer any Voting Trust
Certificate by gift and without any consideration, Shareholder shall give
written notice (a "Transfer Notice") to Trustee, which Transfer Notice shall
set forth all of the terms and conditions of the proposed Transfer, including,
but not limited to, a statement that no consideration of any kind is being
given in exchange for the Transfer of the Voting Trust Certificate, and shall
provide copies of all agreements, instruments or other documents reflecting the
terms and conditions of or to evidence such proposed Transfer. If the Transfer
shall be by gift and not for any consideration, then the Transfer may be
consummated, but only in accordance with the terms and conditions set forth in
the Transfer Notice and the agreements, instruments and other documents
provided with the Transfer Notice; provided, however, that each
8
<PAGE> 9
transferee of a Voting Trust Certificate hereunder shall, by the acceptance
thereof, become a party and subject to this Agreement with the same force and
effect as if such transferee had executed this Agreement, and shall be embraced
within the meaning of the term Shareholder whenever used herein, including the
limited ability to transfer any or all of the Voting Trust Certificates and/or
the Shares.
C. Notwithstanding any of the other provisions of this
Agreement, the Shareholder shall have the absolute right to pledge or
hypothecate any or all Voting Trust Certificates owned by the Shareholder;
provided, however, any such pledge or hypothecation shall be subject to this
Agreement and any foreclosure of such pledge or hypothecation shall be deemed a
Transfer of the Voting Trust Certificates to which subparagraph "(Y)" of
Paragraph "B" of this Article "3" of this Agreement shall apply and the Offer
to Trustee shall be applicable thereto as if such foreclosure was a sale of the
Voting Trust Certificates, and, if such Offer to Trustee shall not be
exercised, the party seeking to foreclose such pledge or hypothecation shall
execute a document substantially in the form annexed hereto as Exhibit "B" to
this Agreement.
D. Upon the death of any registered holder of Voting
Trust Certificates subject to this Agreement, the Trustee shall, upon surrender
to the Trustee of the Voting Trust Certificate(s) which were registered in the
decedent's name duly endorsed for surrender and cancellation, and delivery of
such other documents as the Trustee may reasonably require, cause said Voting
Trust
9
<PAGE> 10
Certificate(s) to be transferred to the decedent's legal representatives,
heirs, successors or assigns, as the case may be; provided, however, that each
transferee of a Voting Trust Certificate hereunder shall, by the acceptance
thereof, become a party and subject to this Agreement with the same force and
effect as if such transferee had executed this Agreement, and shall be embraced
within the meaning of the term Shareholder whenever used herein, including the
limited ability to transfer any or all of the Voting Trust Certificates and/or
the Shares.
E. During the term of this Agreement, the Trustee, in
his capacity as Trustee pursuant to this Agreement, shall not have the power to
sell the Shares without the authorization of the Shareholder. Any sales shall
be made in compliance with all applicable State and Federal securities laws.
F. If a sale of the Shares by the Trustee in his
capacity as Trustee pursuant to this Agreement occurs at any time, the proceeds
shall be distributed by the Trustee to and among the holder or holders of the
Voting Trust Certificates upon the surrender of said Voting Trust Certificates.
The distribution shall be pro rata among the holders of the Voting Trust
Certificates and there shall be no discrimination among the holders in the
distribution.
G. If a Voting Trust Certificate is lost, stolen,
mutilated, or destroyed, the Trustee, in his sole and absolute discretion,
which discretion shall not be unreasonably withheld, may issue a duplicate of
such certificate upon receipt of: (1)
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<PAGE> 11
evidence of such fact satisfactory to the Trustee, (2) indemnity satisfactory
to the Trustee, (3) the existing certificate, if mutilated, and (4)
reimbursement of all costs and expenses incurred by the Trustee in connection
with the issuance of a new Voting Trust Certificate. If a Voting Trust
Certificate is lost, stolen, mutilated or destroyed, the Trustee shall not be
required to recognize any transfer of a Voting Trust Certificate which is not
made in accordance with the provisions of this Agreement. Any person claiming
ownership of the Voting Trust Certificates pursuant to this Paragraph "G" of
this Article "3" of this Agreement shall be required to produce such indicia of
title which is satisfactory to the Trustee in his sole and absolute discretion,
which discretion shall not be unreasonably withheld and shall, in addition,
deliver to the Trustee an indemnity in form and substance which is satisfactory
to the Trustee.
H. In addition to the provisions of subparagraphs "(Y)"
and "(Z)" of Paragraph "B " of this Article " 3 " of this Agreement, a Transfer
of any of the Voting Trust Certificates pursuant to this Agreement shall have
as a condition precedent thereto the requirement that the transferee, prior to
the receipt of any Voting Trust Certificate, execute a document substantially
in the form annexed as Exhibit "B" to this Agreement.
4. Delivery of Voting Trust Certificates for Transfer. Subject
to compliance with applicable laws and the terms of this Agreement, Voting
Trust Certificates shall be delivered for transfer to Trustee at the address of
Trustee for the giving of
11
<PAGE> 12
notices as provided in Paragraph "C" of Article " 14" of this Agreement (or at
such other address as the Trustee may designate by notice as provided in
Paragraph "C" of Article "14" of this Agreement to the registered holders of
the Voting Trust Certificates). Delivery of a Voting Trust Certificate, duly
endorsed by the holder thereof, shall vest title thereto and all rights
thereunder in the transferee as named in the endorsement, or, when presented
duly endorsed in blank, in the bearer thereof. The Trustee may treat such
transferee as the absolute owner thereof, and of all rights and interests
represented thereby, for all purposes whatsoever, and the Trustee shall not be
bound or affected by any notice to the contrary, or by any notice of any trust,
whether expressed or implied, or constructive, or any charge to equity with
respect to the title or ownership of the Voting Trust Certificate, or the
Shares which are represented thereby. Each transferee of a Voting Trust
Certificate hereunder shall, by the acceptance thereof, become a party and
subject to this Agreement with the same force and effect as if such transferee
had executed this Agreement, and shall be embraced within the meaning of the
term Shareholder whenever used herein, including the limited ability to
transfer any or all of the Voting Trust Certificates and/or the Shares.
5. Dividends.
A. Prior to the termination of this Agreement, the
holder of a Voting Trust Certificate shall be entitled to receive payments
which are equal to the cash dividends, if any, which are
12
<PAGE> 13
received by the Trustee upon the Shares of the Company represented by the
Voting Trust Certificate. If any dividend with respect to the Shares which are
deposited with the Trustee is paid, in whole or in part, in stock of the
Company having voting powers, the Trustee shall hold, subject to the terms of
this Agreement, the certificates for the Shares which are received by it on
account of such dividend and the holder of the Voting Trust Certificate
representing Shares on which such stock dividend has been paid shall be
entitled to receive a Voting Trust Certificate issued pursuant to this
Agreement for the number of Shares and class of stock received as such dividend
with respect to the Shares which are represented by such Voting Trust
Certificate. The holders who are entitled to receive the dividends which are
described above shall be those registered as such on the transfer books of the
Trustee at the close of business on the day which is fixed by the Company as
the record date to determine those holders of its stock who are entitled to
receive such dividends.
B. If any dividend with respect to the Shares which are
deposited with the Trustee is paid other than in cash or in capital stock
having voting powers, then the Trustee shall distribute same among the holders
of Voting Trust Certificates registered as such at the close of business on the
day which is fixed by the Company as the record date to determine those holders
of its stock who are entitled to receive such distribution. Said distribution
shall be made to such holders of Voting Trust Certificates, in accordance
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<PAGE> 14
with the number of Shares which are represented by their respective Voting
Trust Certificates.
C. The transfer books of the Trustee may be closed
temporarily by the Trustee for a period not exceeding 30 days preceding the
date which is fixed by the Company for the payment or distribution of dividends
or the distribution of assets or rights, or at any other time in the sole and
absolute discretion of the Trustee.
D. In lieu of receiving cash dividends upon the capital
stock of the Company and paying same to the holders of Voting Trust
Certificates pursuant to the provisions of this Agreement, the Trustee may
instruct the Company in writing to pay such dividends directly to the holders
of any Voting Trust Certificates. Upon receipt of such written instructions,
the Company shall pay such dividends directly to the holders of the Voting
Trust Certificates. Upon such instructions being given by the Trustee to the
Company, and until revoked by the Trustee, all liability of the Trustee with
respect to payment of dividends shall cease. The Trustee may at any time
revoke such instructions and by written notice to the Company direct it to make
dividend payments to the Trustee.
6. Subscription Rights. If any stock or other securities of the
Company are offered for subscription to the holder of the Shares of the Company
which are deposited hereunder, the Trustee, promptly upon receipt of notice of
such offer, shall mail a copy thereof to the holders of the Voting Trust
Certificates. Upon receipt by the Trustee, at least five days prior to the
last day
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<PAGE> 15
which is fixed by the Company for subscription and payment, of a request from
any such registered holder of a Voting Trust Certificate to subscribe on his
behalf, accompanied with the sum of money which is required to be paid for such
shares or securities, the Trustee shall make such subscription and payment.
Upon receiving from the Company the certificates for shares or securities so
subscribed for, the Trustee shall issue to such holder a Voting Trust
Certificate with respect thereto if same be stock having voting powers, but if
same be securities other than stock having voting powers, the Trustee shall
mail or deliver such securities to the certificate holder on whose behalf the
subscription was made, or may instruct the Company to make delivery directly to
the certificate holder entitled thereto.
7. Dissolution of the Company. In the event of the dissolution
or total or partial liquidation of the Company, whether voluntary or
involuntary, the Trustee shall receive the moneys, securities, rights or
property to which the holder of the Shares which are deposited hereunder is
entitled, and shall distribute same pro rata among the holders of the Voting
Trust Certificates and there shall be no discrimination among the holders in
the distribution. The Trustee may, in his sole and absolute discretion,
deposit such moneys, securities, rights or property with any banking company
duly authorized to do business in the jurisdiction where such deposit is made,
with authority and instructions to distribute same as above provided after
first withdrawing the fee of such company from such assets; upon such
15
<PAGE> 16
deposit, all further obligations or liabilities of the Trustee with respect to
such moneys, securities, rights or property so deposited shall cease.
8. Reorganization of the Company. If the Company is merged into
or consolidated with another corporation, or all or substantially all of the
assets of the Company are transferred to another corporation, then in
connection with such transfer the term "Company" for all purposes of this
Agreement shall be taken to include such successor corporation, and the Trustee
shall receive and hold under this Agreement any Shares of such successor
corporation, received on account of the ownership, as the Trustee hereunder, of
the Shares held hereunder at the time of such merger, consolidation and
transfer. The Voting Trust Certificates issued and outstanding under this
Agreement at the time of such merger, consolidation or transfer may remain
outstanding, or the Trustee may, in his discretion, substitute for the Voting
Trust Certificates new Voting Trust Certificates in appropriate form and
substance and the terms "Shares" and "capital stock" as used herein shall be
taken to include any shares which may be received by the Trustee in lieu of all
or any part of the capital stock of the Company.
9. Rights of Trustee.
A. The Trustee shall have the right, subject to the
provisions of this Article "9" of this Agreement, to exercise, in person or by
his nominees or proxies, all shareholders' rights and powers with respect to
all Shares which are deposited hereunder and
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<PAGE> 17
to take part in or consent to any corporate or shareholders' action of any kind
whatsoever which he may exercise in his sole and absolute discretion. Those
rights shall include, but not be limited to, a vote in favor of or against any
resolution or proposed action of any character whatsoever, which may be
presented at any meeting or require the consent of shareholders of the Company.
Without limiting the generality of the foregoing, it is understood that such
action or proceeding may include, upon terms satisfactory to the Trustee or to
his nominees or proxies which are appointed by him, mortgaging, creating a
security interest in and pledging of all or any part of the property of the
Company, the lease or sale of all or any part of the property of the Company,
for cash, securities, or other property, the dissolution of the Company, or the
consolidation, merger, reorganization or recapitalization of the Company. The
Trustee may exercise any of the foregoing powers notwithstanding the fact that
he may also be acting as a trustee of another voting trust agreement or another
trust or as an executor or administrator of an estate or as an agent for other
persons, trusts, estates, corporations or other organizations interested in the
same matters, or may be interested in the same matters in his individual
capacity, as stockholder, director or otherwise.
B. The Trustee shall not be personally responsible with
respect to any action which is taken pursuant to his vote so cast in any matter
or act which is committed or omitted to be done
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<PAGE> 18
pursuant to this Agreement, provided such commission or omission does not
amount to willful misconduct.
C. No Trustee acting under this Agreement shall be
required to give a bond or other security for the faithful performance of his
duties.
10. Term.
A. The holders of the Voting Trust Certificates shall
not have power to revoke this Agreement, and said certificate holders hereby
expressly acknowledge that they shall not have the right or power, whether
alone or in conjunction with others, in whatever capacity, to alter, amend, or
revoke any of the terms of this Agreement, in whole or in part.
B. Subject to the terms of subparagraph "(X)" of
Paragraph "B" of Article "3" of this Agreement providing for early termination
in the event of a Sale, this Agreement shall be effective as of the date hereof
and shall continue in effect until the tenth anniversary of the date hereof,
but shall terminate automatically upon the death of the Trustee, the removal of
the Trustee or determination of the Trustee's incompetency by order of a court
with jurisdiction over the Trustee or the execution by the Trustee of a deed of
termination, which shall be duly acknowledged in the same manner as a
conveyance of real estate which is entitled to be recorded in the State of
Delaware and which shall be mailed by certified mail, return receipt requested,
to the Company at its address for the giving of notices as provided in
Paragraph "C" of Article "14" of this Agreement, and to the holders of the
Voting
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Trust Certificates which are outstanding at the time of the mailing of such
deed of termination. 11. Termination Procedure.
A. Upon the termination of this Agreement at any time,
due to the death of the Trustee or by the execution and filing with the Company
of a deed of termination which is executed by the Trustee in accordance with
the terms of Paragraph "B" of Article "10" of this Agreement or by the
expiration of the ten year period provided in Paragraph "B" of Article "10" of
this Agreement, the Trustee (or, in the case of the death of the Trustee, the
administrator or executor of the estate of Trustee) shall, during the period
commencing thirty (30) days before and ending thirty (30) days after such
termination, give notice of such termination to the holders of the Voting Trust
Certificates which are outstanding at the time of the termination of this
Agreement. After the date which is specified in any such notice (which date
shall be fixed by the Trustee), the Voting Trust Certificates shall cease to
have any effect, and the holders of such Voting Trust Certificates shall have
no further rights pursuant to this Agreement other than to receive the Shares
represented by such Voting Trust Certificates which is distributable pursuant
to the terms hereof upon the surrender of such Voting Trust Certificates.
B. Upon the surrender of the Voting Trust Certificates
properly endorsed, the Trustee (or, in the case of the death of the Trustee,
the administrator or executor of the estate of Trustee) shall deliver to the
registered holders of Voting Trust
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<PAGE> 20
Certificates the number of Shares represented by such Voting Trust Certificates
thereby, such delivery to be made by the Trustee (or such administrator or
executor of the estate of Trustee) at the address specified by the Trustee (or
such administrator or executor of the estate of Trustee) against surrender of
the Voting Trust Certificate.
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<PAGE> 1
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT effective July 15, 1996 (the
"Agreement") by and between Q.E.P. CO., INC. (the "Company") with principal
offices located at 990 South Rogers Circle, Boca Raton, Florida 33487 and LEWIS
GOULD (the "Executive").
NOW THEREFORE, in consideration of the foregoing premises and mutual
covenants herein contained, the parties hereto agree as follows:
1. Employment. The Company agrees to employ the Executive and
the Executive agrees to serve the Company as its Chief Executive Officer and
President.
2. Position and Responsibilities. The Executive shall exert his
best efforts and devote his business time and attention to the affairs of the
Company. The Executive shall be in charge of formulating strategic policy and
direction of the Company and developing, negotiating and concluding
acquisitions, and shall have full authority and responsibility with respect
thereto, subject to the general direction, approval and control of the Board of
Directors and to the restrictions, limitations and guidelines set forth by the
Board of Directors in resolutions adopted in the minutes of the Board of
Directors meetings, copies of which will be provided to the Executive from time
to time and will be incorporated herein by reference. His powers shall include
the authority to hire and fire personnel of the Company except for executive
officers and members of the Board of Directors and with the approval of the
Board of Directors to retain consultants when he deems necessary in order to
implement Company policies.
3. Board of Directors. The Executive shall at all times
discharge his duties in consultation with and under the supervision of the
Board of Directors of the Corporation. In the performance of his duties the
Executive shall make his principal office at the corporate headquarters of the
Company in Boca Raton, Florida. During the duration of this contract the
<PAGE> 2
Company shall not relocate the corporate headquarters further than 50 miles
away from Boca Raton, Florida, without the Executive's consent.
4. Term of Employment. The period of the Executive's employment
under this Agreement shall be deemed to have commenced on July 15, 1996 and
shall continue for a three-year period until July 14, 1999, subject to the
termination provisions set forth in Paragraph 15 hereafter.
Unless either party to this Agreement notifies the other party at
least six months prior to the expiration of this Agreement or any extension
thereof of an intent not to permit the automatic renewal of this Agreement on
expiration hereof (whether of the initial term or any extension), this
Agreement shall be automatically extended without further action by the parties
for successive one-year periods. Should the Executive's salary have been
increased prior to any such extension, the salary paid to the Executive at the
date of such automatic extension shall be deemed for all purposes hereof to be
the salary set forth in Section 6 hereof and is incorporated by reference
herein as if more fully set forth in Section 6 hereof.
5. Duties. During the period of his employment hereunder and
except for illness, specified vacation periods and reasonable leaves of
absence, the Executive shall devote his best efforts and his business time,
attention and skill and exclusive efforts to the business and affairs of the
Company and its affiliated companies, as such business and affairs now exist
and as they may be hereinafter changed or added to, under and pursuant to the
general direction of the Board of Directors of the Company; provided, however,
that, with approval of the Board of Directors of the Company, the Executive may
serve, or continue to serve, on the Board of Directors of, or hold any other
offices or positions in, companies or organizations which, in such Board's
reasonable judgment, will not present any conflict of interest with the Company
or any of its subsidiaries or affiliates or divisions, or materially affect the
performance of Executive's
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<PAGE> 3
duties pursuant to this Agreement; and further provided that the outside
business is not a "Business Opportunity" of the Company, as defined herein. A
Business Opportunity of the Company shall be a product, service, investment,
venture or other opportunity which is either:
(a) directly related to or within the scope of the
existing business of the Company; or
(b) within the logical scope of the business of the
Company, as such scope may be expanded or altered from time-to-time by
the Board of Directors.
The Executive can make investments in Business Opportunities if the
Business Opportunities are not undertaken by the Company. The Company shall
retain full direction and control of the means and methods by which the
Executive performs the services for which he is employed hereunder.
6. Compensation. Commencing on closing of the Company's proposed
public offering, the Company shall pay to the Executive as compensation for his
services the sum of $275,000 per year, payable weekly, or such higher salary as
may be from time to time approved by the Board of Directors, including raises
in the Executive's salary which will be granted during each year hereof in a
minimum percentage amount equal to percentage increases in the cost of living
as evidenced by the Consumer Price Index. In addition, the Executive shall
receive such additional compensation and/or bonuses or stock options as may be
voted to him at the sole discretion of the Board of Directors. In the event
the Company achieves material growth in one or more years during the term
hereof, or any extension hereof, the Board of Directors shall consider and act
upon increases in the Executive's salary during each such year in which the
Company achieves material growth. The determination of material growth shall
be in the discretion of the Board of Directors, subject to the obligation of
the Board of Directors to determine materiality in a reasonable manner
consistent with their fiduciary duty. In addition,
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<PAGE> 4
if the Company's results of operations exceed 110% of budget (as established by
the Company and as ratified by the Board of Directors from time to time) in any
year during the term hereof or any extension hereof, the Board of Directors
will grant the Executive a bonus in an amount to be determined by the parties;
provided, however, that the amount of such bonus shall take into account the
results of operations achieved, the amount by which actual results exceed
budgeted results, and compensation paid by comparable public companies to
executive officers similarly employed. Any additional salary or bonus shall be
paid by the Company on a yearly basis, unless otherwise determined by the Board
of Directors.
7. Expense Reimbursement. The Company will reimburse the
Executive, at least monthly, for all reasonable and necessary expenses incurred
by him in carrying out his duties under this Agreement. The Executive shall
present to the Chief Financial Officer or Controller each month an itemized
account of such expenses in such form as is reasonably required by the Board of
Directors. Such expenses shall include attorneys' fees and disbursements of
Executive in connection with any legal proceedings (including, but not limited
to, arbitration), whether or not instituted by the Company or Executive,
relating to the interpretation or enforcement of any provision of this
Agreement; provided, however, that in the case of any such proceeding to which
the Company and the Executive are adverse parties, the Company shall reimburse
the Executive for all costs and expenses, including attorneys' fees and
disbursements, incurred by the Executive in defense or prosecution of any such
proceeding.
8. Medical and Dental Coverage; Other Benefit Plans. Commencing
July 15, 1996, the Executive and those of his family members who qualify, if
any, will be entitled to participate in the Company's executive group medical
and other group insurance programs. The Executive shall also be entitled to
participate, in his sole discretion but to the maximum extent as may be
permitted by applicable contract rights or law, in all pension, profit sharing,
401(k), cafeteria or similar plans adopted or established by the Company during
the term hereof or any extension.
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9. Medical Examination. The Executive agrees to submit himself
for physical examination on one occasion per year as requested by the Company
for the purpose of the Company's obtaining life insurance on the life of the
Executive for the benefit of the Company; provided, however, that the Company
shall bear the entire cost of such examinations and shall pay all premiums on
any key man life insurance obtained for the benefit of the Company as
beneficiary.
10. Automobile or Automobile Allowance. The Company will provide
the Executive with an automobile or with an automobile allowance in the amount
of $1,090 per month for the duration of his employment with the Company under
this Agreement. The Company shall also provide insurance on, and fuel for,
such automobile.
11. Vacation Time. The Executive shall be entitled to take three
(3) weeks paid vacation per calendar year. Such vacation may not be taken in
any greater than consecutive two (2) week increments. Vacation not used by the
Executive during the calendar year will be carried forward up to a maximum of
eight (8) weeks accrual going forward.
12. Benefits Payable on Disability. If the Executive becomes
disabled from properly performing services hereunder by reason of illness or
other physical or mental incapacity, the Company shall continue to pay the
Executive his then current salary hereunder commencing with the first date of
such disability, and continuing for the duration of this Agreement or any
extension hereof.
If the Executive qualifies for coverage, during the term of this
Agreement, the Company shall purchase and maintain a policy of Disability
Insurance which, after twelve (12) continuous months of disability, will pay a
minimum of $12,000 per month of the Executive's salary. Both during and after
the first twelve (12) months of disability, the Company will supplement or
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<PAGE> 6
augment any disability payments made under any such disability policy or plan
or make any other payment in connection with such disability, in order that the
Executive continues to receive his full salary paid prior to such disability
for the remaining term of this Agreement or any extension thereof.
If the Executive qualifies for coverage, during the term of this
Agreement, the Company shall purchase and maintain a policy of Partial
Disability Insurance which, after twelve (12) continuous months of partial
disability, will pay a minimum of $12,000 per month of the Executive's salary.
Both during and after the first twelve (12) months of partial disability, the
Company will supplement or augment disability payments made under any such
partial disability policy or plan or make any other payment in connection with
such partial disability, in order that the Executive continues to receive his
full salary paid prior to such disability for the remaining term of this
Agreement or any extension thereof.
If the Company is unable to obtain a policy of Disability Insurance,
the Company shall pay the salary specified in Section 6 hereof, as may be
increased from time to time by the Board of Directors, to the Executive from
the first date of such full or partial disability to the expiration date of
this Agreement or any extensions hereof.
13. Obligations of Executive During and After Employment.
(a) The Executive agrees that during the terms of his
employment under this Agreement, he will engage in no other business
activities directly or indirectly, which are or may be competitive
with or which might place him in a competing position to that of the
Company, or any affiliated company.
(b) The Executive realizes that during the course of his
employment, Executive will have produced and/or have access to
confidential business plans, information,
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business opportunity records, notebooks, data, formula,
specifications, trade secrets, customer lists, account lists and
secret inventions and processes of the Company and its affiliated
companies. Therefore, during or subsequent to his employment by the
Company, or by an affiliated company, the Executive agrees to hold in
confidence and not to directly or indirectly disclose or use or copy
or make lists of any such information, except to the extent authorized
by the Company in writing. All records, files, business plans,
documents, equipment and the like, or copies thereof, relating to
Company's business, or the business of an affiliated company, which
Executive shall prepare, or use, or come into contact with, shall
remain the sole property of the Company, or of an affiliated company,
and shall not be removed from the Company's or the affiliated
company's premises without its written consent, and shall be promptly
returned to the Company upon termination of employment with the
Company and its affiliated companies.
(c) Because of his employment by the Company, Executive
will have access to trade secrets and confidential information about
the Company, its business plans, its business accounts, its business
opportunities, its expansion plans into other geographical areas and
its methods of doing business. Executive agrees that for a period of
one (1) year(s) after termination of his employment, he will not,
directly or indirectly, compete with the Company in the business of
manufacturing, marketing and distributing specialty tools and related
products and services for the home improvement market within
seventy-five (75) miles of the offices operated by the Company or its
affiliated companies on the date of termination, unless the Employee
is terminated without cause (as cause is defined in Section 14(a)
hereof).
(d) In the event a court of competent jurisdiction finds
any provision of this Section 14 to be so overbroad as to be
unenforceable, then such provision shall be
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reduced in scope by the court, but only to the extent deemed necessary
by the court to render the provision reasonable and enforceable, it
being the Executive's intention to provide the Company with the
broadest protection possible against harmful competition.
14. Termination by the Company.
(a) Termination for Cause by the Company: During the
term of this Agreement there can be no termination of the Executive
by the Company except for "Termination for Cause" as outlined below:
(1) Notwithstanding anything herein to the
contrary the Company may, without liability, terminate the
Executive's employment hereunder for cause at any time upon
written notice from the Board of Directors specifying such
cause, and thereafter the Company's obligations hereunder
shall cease and terminate; provided, however, that such
written notice shall not be delivered until after the Board of
Directors shall have given the Executive written notice
specifying the conduct alleged to have constituted such cause
and the Executive has failed to cure such conduct, if curable,
within thirty (30) days following receipt of such notice.
Grounds for termination "for cause" include but are not
limited to one or more of the following:
i) A willful breach of duty by the Executive
during the course of his employment;
ii) Habitual neglect of duty by the Executive;
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iii) The Executive's material failure to perform
and/or meet objective and measurable financial standards set
by the Board of Directors and agreed upon by the Executive in
advance;
iv) Disloyal, dishonest or illegal conduct of the
Executive resulting in a conviction classified as a felony
under applicable law.
Should a dispute arise between the Company and the
Executive as to whether the Executive is being terminated with
or without cause, the Company will continue to pay the
Executive his full salary until such dispute is resolved by
agreement of the parties or until conclusion of a court
proceeding or arbitration relating to such determination;
provided, however, that the Company shall not be required to
continue payment of the Executive's salary beyond the
expiration date hereof or the expiration of any extension
hereof.
(b) Termination Without Cause by the Company: After the
completion of the initial year of employment hereunder, the Board of
Directors may terminate the employment of the Executive upon thirty
(30) days written notice without cause by a majority vote thereof. In
the event of termination without cause, the Company will pay the
Executive all compensation due under this Agreement as if such
Agreement was not terminated, through and until its expiration date.
15. Termination by the Executive without Cause. The Executive,
without cause, may terminate this Agreement upon 90 days' written notice to the
Company. In such event, the Executive shall be required to render the services
required under this Agreement during such 90-day period unless otherwise
directed by the Board of Directors. Compensation for such 90
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<PAGE> 10
day period and vacation time not taken by Executive shall be paid to the
Executive at the date of termination.
16. Termination by the Executive with Cause. The Executive may
terminate his employment with the Company at any time, upon 30-day written
notice and opportunity for the Company to remedy any non-compliance, by reason
of (i) the Company's material failure to perform its duties pursuant to this
Agreement, (ii) any material diminishment in the duties and responsibilities,
working facilities, or compensation as described in Paragraphs 2, 5 and 6 of
this Agreement, or (iii) Executive's location of employment is moved more than
40 miles from where it is on the date of this Agreement; provided that such
termination takes place within 90 days after receipt by Executive of written
notice of such relocation. Executive shall be entitled to the remainder of the
contract amount specified herein for a six (6) month period following the
notice of termination for cause.
17. Termination upon Death of Executive. In addition to any other
provision relating to termination, this Agreement shall terminate upon the
Executive's death. Severance allowance or compensation for vacation time not
taken by Executive shall be paid to the Executive's estate for a period of two
years.
18. Lump Sum Compensation. In the event of the occurrence of a
"Triggering Event" which shall be defined to include a non-negotiated (i)
change in ownership of 80% or more of the outstanding shares of the Company, or
(ii) merger, consolidation, reorganization or liquidation of the Company, the
Executive shall receive lump sum compensation equal to 2.9 times his annual
salary and incentive or bonus payments, if any, as shall have been paid to the
Executive during the Company's most recent 12-month period within 30 days of
the Triggering Event. If the total amount of the change of control
compensation were to exceed three (3) times the Executive's base amount (the
average annual taxable compensation of the Executive for the
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five (5) years preceding the year in which the change of control occurs), the
Company and the Executive may agree to reduce the lump sum compensation to be
received by Executive in order to avoid the imposition of the golden parachute
tax as provided in the Tax Reform Act of 1984, as amended by the Tax Reform Act
of 1986.
In the event the Executive is required to hire counsel to negotiate on
his behalf in connection with his termination or resignation from the Company
upon the occurrence of a Triggering Event, or in order to enforce the rights
and obligations of the Company as provided in this Paragraph, the Company shall
reimburse to the Executive all reasonable attorneys' fees which may be expended
by the Executive in seeking to enforce the terms hereof. Such reimbursement
shall be paid every 30 days after the Executive provides copies of invoices
from the Executive's counsel to the Company. However, such invoices may be
redacted to preserve the attorney-client privilege, client confidentiality or
work product.
19. Arbitration. Any controversy, dispute or claim arising out
of, or relating to, this Agreement and/or its interpretation shall, unless
resolved by agreement of the parties, be settled by binding arbitration in Boca
Raton, Florida in accordance with the Rules of the American Arbitration
Association then existing. This Agreement to arbitrate shall be specifically
enforceable under the prevailing arbitration law of the State of Florida. The
award rendered by the arbitrators shall be final and judgment may be entered
upon the award in any court of the State of Florida having jurisdiction of the
matter.
20. General Provisions.
(a) The Executive's rights and obligations under this
Agreement shall not be transferrable by assignment or otherwise, nor
shall Executive's rights be subject to encumbrance or to the claims of
the Company's creditors. Nothing in this Agreement
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shall prevent the consolidation of the Company with, or its merger
into, any other corporation, or the sale by the Company of all or
substantially all of its property or assets.
(b) This Agreement and the rights of Executive with
respect to the benefits of employment referred to in Paragraphs 6, 7,
8, 9, 10, 11, 12, 13 and 18 constitute the entire Agreement between
the parties hereto in respect of the employment of the Executive by
the Company and supersede any and all other agreements either oral or
in writing between the parties hereto with respect to the employment
of the Executive.
(c) Executive shall have no duty to mitigate the payment
due him from Company pursuant to this Agreement and any money earned
by Executive from other sources after his employment with the Company
terminates shall not reduce the amount owed him by the Company
pursuant to this Agreement.
(d) The provisions of this Agreement shall be regarded as
divisible, and if any of said provisions or any part thereof are
declared invalid or unenforceable by a court of competent
jurisdiction, the validity and enforceability of the remainder of such
provisions or parts thereof and the applicability thereof shall not be
affected thereby.
(e) This Agreement may not be amended or modified except
by a written instrument executed by Company and Executive.
(f) This Agreement and the rights and obligations
hereunder shall be governed by and construed in accordance with the
laws of the State of Florida.
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21. Construction. Throughout this Agreement the singular shall
include the plural, and the plural shall include the singular, and the
masculine and neuter shall include the feminine, wherever the context so
requires.
22. Text to Control. The headings of paragraphs and sections are
included solely for convenience of reference. If any conflict between any
heading and the text of this Agreement exists, the text shall control.
23. Authority. The officer executing this agreement on behalf of
the Company has been empowered and directed to do so by the Board of Directors
of the Company.
24. Effective Date. This Agreement may be executed on the dates
noted below but shall only be effective on the effective date of the proposed
public offering of the Company.
FOR THE COMPANY: Q.E.P. CO., INC.
DATED: , 1996 By: /s/ PATRICK L. DAGGETT
---------------------- --------------------------------
Patrick L. Daggett, Chief
Financial Officer
FOR THE EXECUTIVE:
DATED: , 1996 By: /s/ LEWIS GOULD
---------------------- --------------------------------
Lewis Gould
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<PAGE> 1
EXHIBIT 10.1.1
Q.E.P. CO., INC.
OMNIBUS STOCK PLAN OF 1996
1. PURPOSE
The purpose of this Plan is to promote the interest of the Corporation
and its stockholders and the Corporation's success by providing a method
whereby a variety of equity-based incentive and other Awards may be granted to
Employees and Directors of the Corporation and its Subsidiaries and to selected
Consultants who, in the course of their business activities, direct a
significant amount of business to the Corporation.
2. DEFINITIONS
A. "AWARD" means any form of stock option, restricted stock,
Performance Unit, Performance Share, stock appreciation right, dividend
equivalent or other incentive award granted under the Plan.
B. "AWARD NOTICE" means any written notice from the Corporation
to a Participant or agreement between the Corporation and a Participant that
establishes the terms applicable to an Award.
C. "BOARD OF DIRECTORS" means the Board of Directors of the
Corporation.
D. "CODE" means the Internal Revenue Code of 1986, as amended.
E. "COMMITTEE" means the Compensation Committee of the Board of
Directors, or such other committee designated by the Board of Directors, which
is authorized to administer the Plan under Section 3 hereof. The number of
persons who shall serve on the Committee shall be specified from time to time
by the Board of Directors; however, in no event shall there be fewer than three
members of the Committee. The Committee will be composed in a manner such that
the Plan will qualify under Rule 16b-3 with regard to Awards to persons who are
subject to Section 16 of the Exchange Act.
F. "COMMON STOCK" means Common Stock of the Corporation, $.001
par value.
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G. "CONSULTANT" means any individual who renders services
directly to the Corporation or a Subsidiary or to the Corporation's customers
as defined and designated from time to time by the Committee.
H. "CORPORATION" means Q.E.P. Co., Inc.
I. "DIRECTOR" means a member of the Board of Directors or a
member of the Board of Directors of a Subsidiary.
J. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
K. "FAIR MARKET VALUE" means, "on any given date (i) if the
Common Stock is traded in the over-the-counter market and not in The Nasdaq
Stock Market or on any national securities exchange, the per share closing bid
prices of the Common Stock as reported by Nasdaq or an equivalent generally
accepted reporting service, (ii) if the Common Stock is traded in The Nasdaq
Stock Market or on a national securities exchange, the per share closing price
of the Common Stock on which it is so listed, as the case may be, (iii) if
trading in the Common Stock is not reported by Nasdaq, the lowest per share bid
price of the Common Stock as reported in the "pink sheets" published by
National Quotation Bureau, Incorporated, (iv) if no such reported price is
reported for such date pursuant to (i), (ii) or (iii) above, then the bid,
closing sale or bid price, respectively, on the first preceding day on which so
reported, or (v) if the Common Stock is not so traded and/or reported for a
30-day period immediately preceding the date for determining Fair Market Value,
the Committee shall, in good faith and in conformity with the requirements of
Section 422 of the Code, establish a method for determining the Fair Market
Value."
L. "EMPLOYEE" means any employee of the Corporation or a
Subsidiary whose performance the Committee determines can have a significant
effect on the success of the Corporation.
M. "PARTICIPANT" means any individual to whom an Award is
granted under the Plan.
N. "PERFORMANCE SHARE" means a Unit expressed in terms of, or
valued by reference to, a share of Common Stock.
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O. "PERFORMANCE UNIT" means a Unit valued by reference to
designated criteria established by the Committee, other than Common Stock.
P. "PLAN" means this Plan, which shall be known as Q.E.P. Co.,
Inc. 1996 Omnibus Stock Plan.
Q. "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange
Act, or any successor rule.
R. "SUBSIDIARY" means a corporation or other business entity (i)
of which the Corporation directly or indirectly has an ownership interest of
50% or more, or (ii) of which it has a right to elect or appoint 50% or more of
the board of directors or other governing body. A Subsidiary shall include
both currently owned Subsidiaries as well as any Subsidiary hereafter acquired.
S. "UNIT" means a bookkeeping entry used by the Corporation to
record the grant of an Award until such time as the Award is paid, cancelled,
forfeited or terminated.
3. ADMINISTRATION
A. The Plan shall be administered by the Committee. The
Committee shall have the authority to:
(i) construe and interpret the Plan;
(ii) promulgate, amend and rescind rules relating to the
implementation of the Plan;
(iii) make all determinations necessary or advisable for
the administration of the Plan, including the
selection of Employees, Consultants and affiliated
individuals who shall be granted Awards, the number
of shares of Common Stock or Units to be subject to
each Award, the Award price, if any, the vesting or
duration of Awards, and the designation of stock
options as incentive stock options or non-qualified
stock options;
(iv) determine the disposition of Awards in the event of a
Participant's divorce or dissolution of marriage;
(v) determine whether Awards will be granted alone or in
combination or in tandem with other Awards;
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(vi) determine whether cash will be paid or Awards will be
granted in replacement of, or as alternatives to,
other grants under the Plan or any other incentive or
compensation plan of the Corporation, a Subsidiary or
an acquired business unit.
B. Subject to the requirements of applicable law, the Committee
may correct any defect, supply any omission, or reconcile any inconsistency in
the Plan, any Award, or any Award Notice; take any and all other actions it
deems necessary or advisable for the proper administration of the Plan;
designate persons other than members of the Committee to carry out its
responsibilities; and prescribe such conditions and limitations as it may deem
appropriate; except that the Committee may not delegate its authority with
regard to the selection for participation of, or the granting of Awards to,
persons under Section 16 of the Exchange Act. Any determination, decision, or
action of the Committee in connection with the construction, interpretation,
administration, or application of the Plan shall be final, conclusive and
binding upon all persons validly claiming under or through persons
participating in the Plan.
C. The Committee may at any time, and from time to time amend or
cancel any outstanding Award, but only with the consent of the person to whom
the Award was granted.
D. In order that members of the Committee shall be deemed
"disinterested persons" as defined in Rule 16b-3(2)(i), any Awards made to
Directors shall be made pursuant to a formula which at the date hereof shall
provide that the Directors shall automatically receive an award of 500 shares
of Common Stock of the Corporation for each full quarter in which the Director
serves as a Director.
4. ELIGIBILITY
A. Any Employee is eligible to become a Participant in the Plan.
B. Directors who are not Employees of the Corporation or a
Subsidiary shall receive Awards in accordance with Section 7.
C. Consultants who are not Directors of the Corporation shall be
eligible to receive Awards in accordance with Section 8.
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5. SHARES AVAILABLE
Subject to Section 16 of the Plan, the maximum number of shares of
Common Stock available for Award grants (including incentive stock options)
shall be 250,000. Notwithstanding the foregoing sentence, the maximum number
of shares of Common Stock that may be awarded under this Plan in the form of
restricted stock awards pursuant to Section 10 may be limited by the Committee.
6. TERM
The Plan shall become effective on June 20, 1996 and shall continue in
effect until June 20, 2006.
7. AWARDS TO NON-EMPLOYEE DIRECTORS
Options granted to Directors who are not Employees of the Corporation
or a Subsidiary shall be subject to the following terms:
(i) The exercise price shall be equal to 100% of the Fair
Market Value of the underlying Shares of Common Stock
on the date of the grant, payable in accordance with
the alternatives stated in Section 9.B.(ii) of the
Plan;
(ii) The term of the options shall be ten (10) years;
(iii) The options shall be exercisable beginning six months
after the date of the grant; and
(iv) The options shall be subject to Section 14 of the
Plan.
8. AWARDS TO CONSULTANTS
Consultants shall receive Awards in accordance with the following
terms:
A. No Awards of incentive stock options shall be made to
Consultants.
B. Awards of non-qualified stock options to such Consultants
shall be subject to the following terms:
(i) The exercise price shall be not less than 85% of the
Fair Market Value of the underlying shares of Common
Stock on the date of the grant, payable in accordance
with the alternatives stated in Sections 9.B(ii) and
(iii) of the Plan;
(ii) The term of the options shall be ten (10) years;
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(iii) The options shall be exercisable beginning six months
after the date of the grant; and
(iv) The options shall be subject to Section 14 of the
Plan.
9. STOCK OPTIONS
A. Awards may be granted in the form of stock options. Stock
options may be incentive stock options within the meaning of Section 422 of the
Code or non-qualified stock options (i.e., stock options which are not
incentive stock options).
B. Subject to Section 9.C. relating to incentive stock options,
options shall be in such form and contain such terms as the Committee deems
appropriate. While the terms of options need not be identical, each option
shall be subject to the following terms:
(i) The exercise price shall be the price set by the
Committee but may not be less than 85% of the Fair
Market Value of the underlying shares of Common Stock
on the date of the grant.
(ii) The exercise price shall be paid in cash (including
check, bank draft, or money order), or at the
discretion of the Committee, all or part of the
purchase price may be paid by delivery of the
optionee's full recourse promissory note, delivery of
Common Stock already owned by the Participant for at
least six (6) months and valued at its Fair Market
Value, or any combination of the foregoing methods of
payment. In the case of incentive stock options, the
terms of payment shall be determined at the time of
grant.
(iii) Promissory notes given as payment of the exercise
price, if permitted by the Committee, shall contain
such terms as set by the Committee which are not
inconsistent with the following: the unpaid
principal shall bear interest at a rate set from time
to time by the Committee; payments of principal and
interest shall be made no less frequently than
annually; no part of the note shall be payable later
than ten (10) years from the date of purchase of the
underlying shares of Common Stock; and the optionee
shall give such security as the Committee deems
necessary to ensure full payment.
(iv) The term of an option may not be greater than ten
(10) years from the date of the grant.
(v) Neither a person to whom an option is granted nor
such person's legal representative, heir, legatee or
distributee shall be deemed to be the holder of, or
to have any of the rights of a holder or owner with
respect to, any shares of Common Stock subject to
such option unless and until such person has
exercised the option.
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C. The following special terms shall apply to grants of
incentive stock options:
(i) Subject to Section 9.C.(ii) of the Plan, the exercise
price of each incentive stock option shall not be
less than 100% of the Fair Market Value of the
underlying shares of Common Stock on the date of the
grant.
(ii) No incentive stock option shall be granted to any
Employee who directly or indirectly owns stock
possessing more than 10% of the total combined voting
power of all classes of stock of the Corporation,
unless at the time of such grant the exercise price
of the option is at least 110% of the Fair Market
Value of the underlying shares of Common Stock
subject to the option and such option is not
exercisable after the expiration of five (5) years
from the date of the grant.
(iii) No incentive stock option shall be granted to a
person in his capacity as a Employee of a Subsidiary
if the Corporation has less than a 50% ownership
interest in such Subsidiary.
(iv) Options shall contain such other terms as may be
necessary to qualify the options granted therein as
incentive stock options pursuant to Section 422 of
the Code, or any successor statute, including that
such incentive stock options shall be granted only to
Employees, that such incentive stock options are non-
transferrable, and which shall conform to all other
requirements of the Code.
10. RESTRICTED STOCK
A. Awards may be granted in the form of restricted stock.
B. Grants of restricted stock shall be awarded in exchange for
consideration in an amount determined by the Committee. The price, if any, of
such restricted stock shall be paid in cash, or at the discretion of the
Committee, all or part of the purchase price may be paid by delivery of the
Participant's full recourse promissory note, delivery of Common Stock already
owned by the Participant for at least six (6) months and valued at its Fair
Market Value, or any combination of the foregoing methods of payment, provided
no less than the par value of the stock is paid in cash, and the Participant
has rendered no less than three (3) months prior service to the Corporation.
C. Restricted stock awards shall be subject to such restrictions
as the Committee may impose and may include, if the Committee shall so
determine, restrictions on transferability and restrictions relating to
continued employment.
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D. The Committee shall have the discretion to grant to a
Participant receiving restricted shares all or any of the rights of a
stockholder while such shares continue to be subject to restrictions.
11. PERFORMANCE UNITS AND PERFORMANCE SHARES
A. Awards may be granted in the form of Performance Units or
Performance Shares. Awards of Performance Units and Performance Shares shall
refer to a commitment by the Corporation to make a distribution to the
Participant or to his beneficiary depending on (i) the attainment of the
performance objective(s) and other conditions established by the Committee and
(ii) the base value of the Performance Unit or Performance Shares,
respectively, as established by the Committee.
B. Settlement of Performance Units and Performance Shares may be
in cash, in shares of Common Stock, or a combination thereof. The Committee
may designate a method of converting Performance Units into Common Stock,
including, but not limited to, a method based on the Fair Market Value of
Common Stock over a series of consecutive trading days.
C. Participants shall not be entitled to exercise any voting
rights with respect to Performance Units or Performance Shares, but the
Committee in its sole discretion may attach dividend equivalents to such
Awards.
12. STOCK APPRECIATION RIGHTS
A. Awards may be granted in the form of stock appreciation
rights. Stock appreciation rights may be awarded in tandem with a stock
option, in addition to a stock option, or may be free-standing and unrelated to
a stock option.
B. A stock appreciation right entitles the Participant to receive
from the Corporation an amount equal to the positive difference between (i) the
Fair Market Value of Common Stock on the date of exercise of the stock
appreciation right and (ii) the grant price or some other amount as the
Committee may determine at the time of grant (but not less than the Fair Market
Value of Common Stock on the date of grant).
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C. With respect to persons subject to Section 16 of the Exchange
Act, a stock appreciation right may only be exercised during a period which (i)
begins on the third business day following a date when the Corporation's
quarterly summary statement of sales and earnings is released to the public and
(ii) ends on the 12th business day following such date. This Section 12.C
shall not apply if the exercise occurs automatically on the date when a related
stock option expires.
D. Settlement of stock appreciation rights may be in cash, in
shares of Common Stock, or a combination thereof, as determined by the
Committee.
13. DEFERRAL OF AWARDS
At the discretion of the Committee, payment of an Award, dividend
equivalent, or any portion thereof may be deferred until a time established by
the Committee. Deferrals shall be made in accordance with guidelines
established by the Committee to ensure that such deferrals comply with
applicable requirements of the Code and its regulations. Deferrals shall be
initiated by the delivery of a written, irrevocable election by the participant
to the Committee or its nominee. Such election shall be made prior to the date
specified by the Committee. The Committee may also (A) credit interest
equivalents on cash payments that are deferred and set the rates of such
interest equivalents and (B) credit dividends equivalents on deferred payments
denominated in the form of shares of Common Stock.
14. EXERCISE OF STOCK OPTIONS OR AWARDS UPON TERMINATION OF EMPLOYMENT OR
SERVICES.
A. Options granted under Sections 7 and 9 shall be exercisable
until the Participant's (i.e., Non-Employee Directors or Employees) termination
of service or within the following specified periods only. The definition of
termination of service applicable to Consultants shall be defined and
determined by the Committee in its sole discretion. Subject to Section 22,
stock options granted to other Participants may permit the exercise of options
upon the Participant's termination of employment within the following periods,
or such shorter periods as determined by the Committee at the time of grant:
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(i) If on account of death, within twelve (12) months of
such event by the person or persons to whom the
Participant's rights pass by will or the laws of
descent or distribution.
(ii) If on account of retirement (as defined from time to
time by Corporation policy), stock options may be
exercised within 3 months of such termination.
(iii) If on account of resignation, options may be
exercised within one (1) month of such termination.
(iv) If for cause (as defined from time to time by
Corporation policy), no unexercised option shall be
exercisable to any extent after termination.
(v) If on account of the taking of a leave of absence for
the purpose of servicing the government or the
country in which the principal place of employment of
the Participant is located, either in a military or a
civilian capacity, or for such other purpose or
reason as the Committee may approve, a Participant
shall not be deemed during the period of any such
absence alone, to have terminated his service, except
as the Committee may otherwise expressly provide.
(vi) If on account of disability, within one year
following the disability of the Participant.
(vii) If for any reason other than death, retirement,
resignation, cause, or disability, options may be
exercised within three (3) months of such
termination.
B. An unexercised option shall be exercisable only to the extent
that such option was exercisable on the date the Participant's employment or
service terminated. Notwithstanding the foregoing, and except as provided in
Section 14.A. above, terms relating to the exerciseability of options may be
amended by the Committee before or after such termination, except in respect to
options granted under Section 7.
C. In no case may an unexercised option be exercised to any
extent by anyone after expiration of its term.
D. To the extent any Award other than stock options is
exercisable by a Participant, such Award shall be exercisable only until
termination (in the case of Employees only) or within the time periods
specified in A(i) to A(vii) above. In the case of a non-Employee Participant,
such Award will be exercisable in accordance with the terms thereof unless the
Committee has required continued service
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to the Corporation or a Subsidiary as a condition to the exercise of an Award,
in which event the exercise of an Award following termination of services by a
non-Employee Participant shall be as provided for by the Committee.
15. NONASSIGNABILITY
The rights of a Participant under the Plan shall not be assignable by
such Participant, by operation of law or otherwise, except by will or the laws
of descent and distribution. During the lifetime of the person to whom a stock
option or similar right (including a stock appreciation right) is granted, such
person alone may exercise it. No Participant may create a lien on any funds,
securities, rights or other property to which such Participant may have an
interest under the Plan, or which is held by the Corporation for the account of
the Participant under the Plan.
16. ADJUSTMENT OF SHARES AVAILABLE
The Committee shall make appropriate and equitable adjustments in the
shares of Common Stock available for future Awards and the number of shares of
Common Stock covered by unexercised, unvested or unpaid Awards upon the
subdivision of the outstanding shares of Common Stock; the declaration of a
dividend payable in Common Stock; the declaration of a dividend payable in a
form other than Common Stock in an amount that has a material effect on the
price of the shares of Common Stock; the combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise) into a
lesser number of shares of Common Stock; a recapitalization; or a similar
event.
17. PAYMENT OF WITHHOLDING TAXES
As a condition to receiving or exercising an Award, as the case may
be, the Participant shall pay to the Corporation or the employer Subsidiary the
amount of all applicable Federal, state, local and foreign taxes required by
law to be paid or withheld relating to receipt or exercise of the Award.
Alternatively, the Corporation may withhold shares of Common Stock with an
aggregate Fair Market Value equal to
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such withholding taxes, from any Award in shares of Common Stock, to the extent
the withholding is required by law. The Corporation also may deduct such
withholding taxes from any Award paid in cash.
18. AMENDMENTS
The Board of Directors may amend the Plan at any time and from time to
time, subject to the receipt of stockholder approval where required by Rule
16b-3. Rights and obligations under any Award granted before amendment of the
Plan shall not be materially altered or impaired adversely by such amendment,
except with consent of the person to whom the Award was granted.
19. REGULATORY APPROVALS AND LISTINGS
Notwithstanding any other provision in the Plan, the Corporation shall
have no obligation to issue or deliver certificates for shares of Common Stock
under the Plan prior to (A) obtaining approval from any governmental agency
which the Corporation determines is necessary or advisable, (B) admission of
such shares to listing on the stock exchange on which the Common Stock may be
listed, and (C) completion of any registration or other qualification of such
shares under any state or Federal law or ruling of any governmental body which
the Corporation determines to be necessary or advisable.
20. NO RIGHT TO CONTINUED EMPLOYMENT OR GRANTS
Participation in the Plan shall not give any Employee any right to
remain in the employ of the Corporation or any Subsidiary. Further, the
adoption of this Plan shall not be deemed to give any Employee or other
individual the right to be selected as a Participant or to be granted an Award.
21. NO RIGHT, TITLE, OR INTEREST IN CORPORATION ASSETS
No Participant shall have any rights as a stockholder of the
Corporation until Participant acquires an unconditional right under an Award to
have shares of Common Stock issued to such Participant. In the case of a
recipient of a stock option, the unconditional right to have shares of Common
Stock issued to such Participant shall be defined as the date upon which the
Participant has exercised the stock option and tendered valid consideration to
the Corporation for the exercise thereof. To the extent any person
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acquires a right to receive payments from the Corporation under this Plan, such
rights shall be no greater than the rights of an unsecured creditor of the
Corporation.
22. SPECIAL PROVISION PERTAINING TO PERSONS SUBJECT TO SECTION 16
Notwithstanding any other item of this Plan, the following shall apply
to persons subject to Section 16 of the Exchange Act, except in the case of
death or disability or unless Section 16 shall be amended to provide otherwise
than as described below, in which event this Plan shall be amended to conform
to Section 16, as amended:
A. Restricted stock or other equity securities (within the
meaning used in Rule 16b-3 of the Exchange Act or any successor rule) offered
pursuant to this Plan must be held for at least six (6) months from the date of
grant; and
B. At least six (6) months must elapse from the date of
acquisition of any stock option, Performance Unit, Performance Share, stock
appreciation right or other derivative security (within the meaning used in
Rule 16b-3 of the Exchange Act or any successor rule) issued pursuant to the
Plan to the date of disposition of such derivative security (other than upon
exercise or conversion) or its underlying equity security.
23. INDEMNIFICATION
In addition to such other rights of indemnification as they may have
as Directors, the members of the Board of Directors or the Committee
administering the Plan shall be indemnified by the Corporation against
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or
in connection with any appeal therein, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan or any Award granted thereunder, and against all amounts paid by
them in settlement thereof (provided such settlement is approved by legal
counsel selected by the Corporation) or paid by them in satisfaction of a
judgment in any such action, suit or proceeding, except in relation to matters
as to which
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it shall be adjudged in such action, suit or proceeding that such member is
liable for negligence or misconduct in the performance of his duties; provided
that within 60 days after institution of any such action, suit or proceeding,
the member shall in writing offer the Corporation the opportunity, at its own
expense, to handle and defend the same.
24. GOVERNING LAW
The Plan shall be governed by and construed in accordance with the
laws of the State of Delaware.
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have issued our report dated April 30, 1996 (except for Note N, as to
which the date is June 25, 1996), accompanying the financial statements and
schedules of Q.E.P. Co., Inc. and Subsidiaries contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
New York, New York
August 2, 1996
