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Filed pursuant to Rule 424(b)(1)
File No. 333-7477
PROSPECTUS
1,200,000 SHARES
LOGO
COMMON STOCK
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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. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "QEPC."
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SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION
PROSPECTIVE INVESTORS SHOULD CONSIDER.
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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.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
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Per Share......................... $8.50 $.616 $7.884 $7.884
Total(3).......................... $10,200,000 $739,500 $7,883,750 $1,576,750
=================================================================================================
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(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 $548,000 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 150,000 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 $11,475,000, $831,938,
$9,066,312 and $1,576,750, respectively. See "Underwriting."
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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 September 23, 1996.
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CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 17, 1996
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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.
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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 September 16,
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 September 1996. Its principal
executive offices are located at 990 South Rogers Circle, Boca Raton, Florida
33487, and its telephone number is (561) 994-5550.
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THE OFFERING
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Common Stock offered:
By the Company................................. 1,000,000 shares
By the Selling Shareholders.................... 200,000 shares
Common Stock to be outstanding after this 2,504,894 shares(1)
offering.......................................
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
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(1) Includes 4,894 shares of Common Stock to be issued in exchange for 166,385
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)
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FISCAL YEAR ENDED THREE MONTHS
---------------------------------- ENDED MAY 31,
FEB. 28, FEB. 28, FEB. 29, ------------------
1994 1995 1996 1995 1996
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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..................................................... 1,171 459
Net income per share(1)........................................ $ .65 $ .27
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MAY 31, 1996
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FEBRUARY 29, 1996 ACTUAL AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................... $2,931 $3,401 $ 10,737
Total assets............................. 7,880 7,818 13,466
Total liabilities........................ 4,455 3,961 2,273
Shareholders' equity..................... 3,425 3,857 11,193
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(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 198,587 shares of Common
Stock offered by the Company at $8.50 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 $8.50 per share, and the application of the estimated net
proceeds therefrom. Gives effect to repayment of $2,600,000 under the
Company's credit facility, of which $2,628,000 was outstanding as of August
31, 1996. See "Use of Proceeds."
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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 89.5%, 74.9%, 76.5% and 77.6% 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 55.9%, 46.1%, 51.5% and 49.8% of net sales, respectively, and
sales to The Lowe's Companies, Inc. ("Lowe's") accounted for 7.8%, 9.4%, 10.1%
and 11.7% 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
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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
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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 7% and 5% 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
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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."
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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 $7.23 to $7.95 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 $10.20 (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> 10
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
319,162 shares of Series A Preferred Stock and 17,500 shares of Series C
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%. Holders of the Series C Preferred
Stock are entitled to receive annual dividends on a cumulative basis at the rate
of $0.035 per share per annum. 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 and the Series C Preferred Stock were issued in connection with
two acquisitions 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 and the Series C 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 $4.06
(47.8%) per share, which amount represents the difference between the pro forma
net tangible book value per share after the offering and the public offering
price of $8.50 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 has been
approved for quotation on the Nasdaq National Market, 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> 11
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> 12
USE OF PROCEEDS
The net proceeds from the sale of the 1,000,000 shares of Common Stock
offered by the Company are estimated to be approximately $7,336,000 ($8,487,000
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 $2,600,000 of the net proceeds to reduce the
outstanding balance under its revolving bank credit facility. The balance
outstanding under the credit facility was $2,628,000 as of August 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 $1,200,000 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 and
Class C Preferred Stock outstanding on the date of this Prospectus, the
Company's aggregate annual dividend requirement approximates $12,000, assuming
dividends are declared on an annual basis. See "Description of Securities."
12
<PAGE> 13
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 1,504,894 shares of Common Stock outstanding
(assuming the issuance of 4,894 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 $8.50 per share, the pro forma
net tangible book value of the Company as of May 31, 1996 would have been
$11,131,000, or $4.44 per share. This amount represents an immediate increase in
net tangible book value of $1.96 per share to the existing holders of Common
Stock and an immediate dilution of $4.06 per share to new investors. "Dilution"
is determined by subtracting pro forma net tangible book value per share after
the offering from the offering price per share of Common Stock, as illustrated
by the following table:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $ 8.50
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.......................... 1.96
-----
Pro forma net tangible book value per share after the
offering.................................................. 4.44
------
Dilution per share to new investors......................... $ 4.06
======
</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 $8.50
per share, before deduction of underwriting discounts and other estimated
offering expenses, and issuance of 4,894 shares of Common Stock in exchange for
166,385 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)................ 1,504,894 60.1% $ 3,857,038 31.2% $ 2.56
New investors(2)........................... 1,000,000 39.9 8,500,000 68.8 $ 8.50
--------- --- ----------- ------
Total............................ 2,504,894 100.0% $12,357,038 100.0%
========= === =========== ======
</TABLE>
- ---------------
(1) Includes Common Stock of $1,502, Preferred Stock of $336,662, additional
paid-in capital of $197,145 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 1,304,894, 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> 14
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 $8.50 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, 336,662 shares issued
and outstanding, as adjusted(2).................................... 503 337
Common Stock, par value $.001 per share;
10,000,000 shares authorized; 1,500,000
shares issued and outstanding, 2,504,894
shares issued and outstanding, as adjusted(2)(3)................... 1 2
Additional paid in capital............................................ 31 7,532
Retained earnings..................................................... 3,380 3,380
Cost of stock held in treasury........................................ (58) (58)
------ -------
Total shareholders' equity............................................ 3,857 11,193
------ -------
Total capitalization............................................... $5,680 $11,328
====== =======
</TABLE>
- ---------------
(1) The Company will use $2,600,000 of the net proceeds of this offering to
reduce the outstanding balance under the bank credit facility, which at
August 31, 1996 totaled $2,628,000.
(2) Gives effect to the issuance of 4,894 shares of Common Stock in exchange for
166,385 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> 15
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 have
been derived from the Consolidated Financial Statements of the Company. The
consolidated statements of income for each of the three years in the period
ended February 29, 1996 and the consolidated balance sheets at February 28, 1995
and February 29, 1996 have been audited by the Company's independent auditors
and are included elsewhere in this Prospectus. The selected balance sheet data
as of February 28, 1992, 1993 and 1994 and the selected statement of income data
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)................ $ .65 $ .27
======= ======
</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 198,587 shares of Common
Stock offered by the Company at $8.50 per share and the application of the
proceeds therefrom to repay an outstanding bank credit facility as of May
31, 1996.
15
<PAGE> 16
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 77.6% 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 49.8% 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 11.7% 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> 17
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 $237,000 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> 18
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, $117,000 represented increased rent and
payroll costs of the Acquired Companies, $173,000 primarily 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> 19
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 $411,000 of
general and administrative expenses incurred with respect to the Acquired
Companies, $156,000 of increased payroll costs, $70,000 of increased
professional fees and a $56,000 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> 20
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 $2,600,000 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> 21
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> 22
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> 23
The growth experienced by the home improvement market and certain of the
Company's customers was not directly attributable to actions taken by the
Company. However, the Company developed specific responses in an effort to
capitalize on such 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> 24
<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
---- ---- ---- -------------------------- ------- ------- ------- ------ ---- ---- ---- ------ ------ ---------
<C> <C> <C> <S> <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.
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: National Home Center News; U.S. Commerce Dept. (1995-2000 Projected)
24
<PAGE> 25
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 "COMBINED RETAIL SALES AS % OF INDUSTRY TOTAL"
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: U.S. Department of Commerce
25
<PAGE> 26
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.
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<PAGE> 27
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,
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<PAGE> 28
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 49.8% and 11.7% 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
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<PAGE> 29
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> 30
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> 31
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.
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<PAGE> 32
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> 33
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
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<PAGE> 34
which there has been a release or threatened release of hazardous substances.
Courts have interpreted 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 from the Company 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. On the date hereof, there are issued and outstanding
319,162 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.
34
<PAGE> 35
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 $203,424 11/30/97 --
Mahwah, NJ Administrative offices......... 2,400 29,040 11/30/97 --
Marion, IN Manufacturing; warehouse;
assembly..................... 40,000 N/A Company owned --
Carson, CA Administrative, sales;
marketing; warehouse......... 29,200 153,120 08/14/96(1) 5 yrs.
Pompano Beach, FL Manufacturing.................. 10,000 40,704 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 consolidated these manufacturing and warehousing operations
into its facility 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.
35
<PAGE> 36
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
H. Timothy Goeler..................... 43 Vice President -- Sales
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
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.
H. Timothy Goeler has served as Vice President -- Sales since September
1996. From 1993 to August 1996, Mr. Goeler was employed as vice president of
sales and marketing of New York Lighter Company, a consumer products firm. From
1990 to 1993, he was employed as vice president of marketing for Scripto-Tokai
Corporation, a writing instrument and lighter manufacturer.
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.
36
<PAGE> 37
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 February 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 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 July 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.
37
<PAGE> 38
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 11,779
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 16,000 shares of Common Stock at an exercise
price of $7.95 per share, and Mr. Daggett received options to purchase 50,000
shares of Common Stock at an exercise price of $7.23 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 $7.23 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
38
<PAGE> 39
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 $7.23 to $7.95 per share and a weighted average
exercise price per share of $7.38.
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> 40
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> 41
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of August 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.............. -- -- -- -- --
H. Timothy Goeler............... -- -- -- -- --
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 (12 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> 42
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, 2,504,894 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 319,162 shares of Series A Preferred Stock, no
shares of Series B Preferred Stock and 17,500 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> 43
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> 44
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 2,504,894 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 4,894 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 86.8% 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> 45
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.............................................. 800,000
Baird, Patrick & Co. Inc.................................................. 40,000
Black & Company, Inc...................................................... 40,000
Dabney/Resnick Inc........................................................ 40,000
Doft & Co., Inc........................................................... 40,000
Donald & Co. Securities, Inc.............................................. 40,000
Fahnestock & Co. Inc...................................................... 40,000
Hanifen, Imhoff Inc....................................................... 40,000
JW Charles Securities, Inc................................................ 40,000
LT Lawrence & Company, Inc................................................ 40,000
Yamaichi International (America), Inc..................................... 40,000
---------
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 $.33
per share. The Underwriters may allow, and such dealers may reallow, a
concession not exceeding $.10 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 150,000 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> 46
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> 47
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> 48
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 49
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> 50
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.
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> 51
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> 52
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........................ $ .65 $ .27
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 53
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> 54
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
Notes issued................................ 230,000
Preferred stock issued...................... 443,047
---------
Liabilities assumed......................... $ 14,047
=========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 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)
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 56%, 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> 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)
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> 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)
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> 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)
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
September 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 166,385 shares of outstanding preferred stock into 4,894
shares of common stock. Included in the shares to be converted is 106,385 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 $106,385 (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 287,987 and 198,587 shares of common stock
necessary to repay $2,448,000 and $1,687,990 of debt, including the elimination
of $121,000 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> 65
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> 66
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 67
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> 68
================================================================================
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
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 OCTOBER 12, 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
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CRUTTENDEN ROTH
INCORPORATED
SEPTEMBER 17, 1996
================================================================================
