FORM 10-Q
Securities and Exchange Commission
Washington D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: May 31, 1997
Commission file number: 0-21161
Q.E.P. CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2983807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1081 HOLLAND DRIVE
BOCA RATON, FLORIDA 33487
(Address of principal executive offices)
(Zip code)
(561) 994-5550
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of July 7, 1997: 2,654,894 shares of common stock, par value
$.001 per share.
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Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets (Unaudited)
May 31, 1997 and February 28, 1997....................................................................... 3
Consolidated Statements of Income (Unaudited)
For the Three Months Ended May 31, 1997 and 1996......................................................... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended May 31, 1997 and 1996......................................................... 5
Notes to Consolidated Financial Statements........................................................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 7
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................................................................... 9
Item 6 - Exhibits and Reports on Form 8-K............................................................................ 9
Signatures........................................................................................................... 10
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2
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<CAPTION>
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND FEBRUARY 28, 1997
(UNAUDITED)
MAY 31, 1997 FEBRUARY 28, 1997
------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 4,225,614 $ 4,901,131
Accounts receivable, less allowance for
doubtful accounts of $61,100 at
May 31, 1997 and February 28, 1997....................... 5,341,741 5,507,809
Inventories................................................. 5,927,719 4,696,400
Other current assets........................................ 758,701 425,578
------------- ------------
Total current assets..................................... $ 16,253,775 15,530,918
PROPERTY AND EQUIPMENT - net...................................... 618,273 415,064
DEFERRED INCOME TAXES............................................. 204,900 248,000
OTHER ASSETS...................................................... 286,325 240,005
------------- -------------
$ 17,363,273 $ 16,433,987
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities.................... $ 3,200,841 $ 2,792,049
Other current liabilities................................... 26,662 43,968
------------- ------------
Total current liabilities................................ 3,227,503 2,836,017
OTHER LIABILITIES................................................. 144,812 144,893
COMMITMENTS.......................................................
STOCKHOLDERS' EQUITY:
Preferred stock, 2,500,000 shares
authorized, $1.00 par value; 336,660 shares
issued and outstanding at May 31, and
February 28, 1997,....................................... 336,660 336,660
Common stock, 10,000,000 shares
authorized, $.001 par value;
2,654,894 issued and outstanding at May 31,
and February 28, 1997.................................... 2,655 2,655
Additional paid-in capital.................................. 8,446,719 8,433,719
Retained earnings........................................... 5,262,824 4,737,943
Cost of stock held in treasury.............................. (57,900) (57,900)
------------- ------------
$ 17,363,273 $ 16,433,987
============= =============
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The accompanying notes are an integral part of these statements.
3
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Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MAY 31, 1997 AND 1996
(UNAUDITED)
THREE MONTHS ENDED
------------------------------------
May 31, May 31,
1997 1996
------- -------
<S> <C> <C>
Net Sales............................................ $ 9,545,904 $ 7,702,148
Cost of goods sold................................... 5,889,520 4,800,998
------------ ------------
Gross profit..................................... 3,656,384 2,901,150
Costs and expenses
Shipping......................................... 740,254 565,242
General and administrative....................... 1,031,143 767,318
Selling and marketing............................ 1,066,884 817,748
Foreign exchange losses, net..................... 2,763 256
------------ ------------
Operating income................................. 815,340 750,586
Interest income (expense)............................ 45,121 (43,925)
------------ ------------
Income before provision for income taxes......... 860,461 706,661
Provision for income taxes........................... 335,580 267,500
------------ ------------
NET INCOME....................................... $524,881 $ 439,161
============ ============
Primary and fully diluted net income
per common share................................. $ 0.20 $ 0.29
============ ============
Weighted average number of shares
outstanding...................................... 2,660,666 1,500,000
============ ============
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The accompanying notes are an integral part of these statements.
4
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Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 1997 AND 1996
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------------
May 31, May 31,
1997 1996
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Cash flows from operating activities
Net income....................................... $ 524,881 $ 439,161
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities
Depreciation and amortization.................. 20,656 29,831
Amortization of fair market value in
excess of cost of business acquired......... (7,500) (7,500)
Stock option compensation...................... 13,000 ---
Deferred income taxes.......................... 43,100 3,000
Accounts receivable............................ 166,068 519,675
Inventories.................................... (1,231,319) (232,179)
Other current assets........................... (333,123) (69,012)
Other assets................................... (49,313) 8,489
Accounts payable and accrued liabilities....... 408,792 (121,101)
------------ ------------
Net cash provided by (used in)
operating activities........................ (444,758) 570,364
------------ ------------
Cash flows from investing activities
Capital expenditures................................. (220,872) (1,042)
------------ ------------
Net cash used in investing activities.......... (220,872) (1,042)
------------ ------------
Cash flow from financing activities
Net payments under line of credit.............. --- (759,897)
Net payments of debt........................... (9,887) (37,458)
Cash overdraft................................. --- 432,417
Dividends...................................... --- (7,448)
Payment of deferred offering costs............. --- (60,000)
------------ ------------
Net cash used in financing activities.......... (9,887) (432,386)
------------ ------------
NET INCREASE (DECREASE) IN CASH................ (675,517) 136,936
Cash and cash equivalents at beginning of period..... 4,901,131 179,138
------------ ------------
Cash and cash equivalents at end of period........... $ 4,225,614 $ 316,074
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid.................................. $ --- $ 50,916
Income taxes paid.............................. $ 228,613 $ 13,000
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The accompanying notes are an integral part of these statements.
5
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Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. BASIS OF PRESENTATION.
The accompanying financial statements for the interim periods are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the periods
presented. These financial statements should be read in conjunction with the
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations, contained in the
Annual Report on Form 10-K for the year ended February 28, 1997, of Q.E.P. Co.,
Inc. (the "Company") as filed with the Securities and Exchange Commission. The
February 28, 1997 balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles. The results of operations for the three months ended May 31, 1997
are not necessarily indicative of the results for the full fiscal year ending
February 28, 1998.
This report contains forward looking statements which involve risks and
uncertainties and are made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995. The Company's actual results may
differ significantly from the results discussed in the forward looking
statements.
Note 2. INVENTORIES.
The major classes of inventories are as follows:
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MAY 31, 1997 FEBRUARY 28, 1997
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Raw materials and work-in-process.................... $ 621,968 $ 580,767
Finished goods....................................... 5,305,751 4,115,633
------------- -------------
$ 5,927,719 $ 4,696,400
============= =============
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Note 3. 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 adjusted for the
dilutive effects of common share equivalents, where applicable. The computation
reduces the net income available per common share by the amount of preferred
stock dividends.
Note 4. FUTURE EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," which is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The effect of adopting
this new standard is not expected to have a material impact on the disclosure of
earnings per share in the financial statements.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 primarily used 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.
This report contains forward-looking statements which are made pursuant to
the safe harbor provisions of the Securities Litigation Reform Act of 1995 and
which are subject to risks and uncertainties which could cause actual results to
differ materially from those discussed in the forward-looking statements and
from historical results of operations. Among the risks and uncertainties which
could cause such a difference are those relating to the Company's dependence
upon a limited number of customers for a substantial portion of its sales, the
Company's reliance upon suppliers and sales agents for the purchase of finished
products which are then resold by it, the Company's dependence upon certain key
personnel, its ability to manage its growth, and the risk of economic and market
factors affecting the Company or its customers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1997 COMPARED TO THREE MONTHS ENDED MAY 31,
1996
Net sales for the three months ended May 31, 1997 (the "fiscal 1998
period") were approximately $9,546,000, compared to $7,702,000 for the three
months ended May 31, 1996 (the "fiscal 1997 period"), an increase of $1,844,000
or 23.9%. The increase is primarily the result of increased sales to home
centers, specialty retailers and independent distributors, resulting from
increased market penetration, new store openings by major home center chain
customers and new product activity.
Gross profit for the fiscal 1998 period was approximately $3,656,000,
compared to $2,901,000 for the fiscal 1997 period, an increase of $755,000 or
26%. As a percentage of net sales, gross profit increased to 38.3% in the fiscal
1998 period from 37.7% in the fiscal 1997 period. The increase in gross profit
margin was due primarily to a shift in product mix towards higher margin
products.
Shipping expenses for the fiscal 1998 period were approximately
$740,000, compared to $565,000 for the fiscal 1997 period, an increase of
$175,000 or 31%. As a percentage of net sales, these expenses increased to 7.8%
in the fiscal 1998 period from 7.3% in the fiscal 1996 period. The increase in
these expenses was primarily due to additional labor costs to handle increased
volume and increased freight rates charged by common carriers.
General and administrative expenses for the fiscal 1998 period were
approximately $1,031,000, compared with $767,000 for the fiscal 1997 period, an
increase of $264,000 or 34.4%. As a percentage of net sales, these expenses
increased to 10.8% in the fiscal 1998 period from 10.0% in the fiscal 1997
period. The increase in expenses was primarily attributable to higher
administrative costs associated with the Company's growth.
Selling and marketing costs for the fiscal 1998 period were
approximately $1,067,000, compared to $818,000 for the fiscal 1997 period, an
increase of $249,000 or 30.4%. As a percentage of net sales, these expenses
increased to 11.2% in the fiscal 1998 period from 10.6% in the fiscal 1997
period. The increase was primarily attributable to additional personnel,
including the hiring of a Senior Vice President of Sales and Marketing,
commissions and an increase in the Company's marketing programs.
Interest income, net, for the fiscal 1998 period was approximately
$45,000, compared to interest expense, net of $44,000 for the fiscal 1997
period. The improvement is primarily the result of retirement of bank debt and
an increase in the Company's interest earning cash balances resulting from the
proceeds of the Company's initial public offering in fiscal 1997.
Provision for income taxes was approximately $336,000 in the fiscal
1998 period, compared to $268,000 in the fiscal 1997 period, an increase of
$68,000 or 25.4%. The effective tax rate was approximately 39% in the fiscal
1998 period, compared to 37.9% in the fiscal 1997 period. The change in the
effective tax rate reflects the tax based upon the most recent effective tax
rates available.
As a result of the above, net income for the fiscal 1998 period
increased to $525,000 from $439,000 in the fiscal 1997 period, an increase of
$86,000 or 19.6%. This represents a decrease in net income as a percentage of
net sales to 5.5% in the fiscal 1998 period from 5.7% in the fiscal 1997 period.
7
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LIQUIDITY AND CAPITAL RESOURCES
Working capital as of May 31, 1997 increased from approximately
$12,695,000 at February 28, 1997 to $13,026,000, an increase of $331,000,
primarily as a result of the net income during the quarter. The Company invests
cash in excess of anticipated current operational requirements in commercial
paper with a maturity of 90 days or less and rated AA or higher. The Company
states the value of such investments at market price and classifies them as cash
equivalents on its balance sheet.
Net cash used in operating activities during the three month period
ended May 31, 1997 was $445,000 compared to net cash provided by operating
activities of $570,000 for the comparable period in fiscal 1997. The change in
the use of cash by operating activities was primarily due to an increase in
inventory. Net cash used in investing activities was $221,000 compared to $1,000
for the comparable period in fiscal 1997, primarily due to the purchase of
manufacturing equipment.
Net cash used in financing activities was $10,000 compared to $432,000
in the comparable period in fiscal 1997 due to there being no borrowings or
repayments under the line of credit during the fiscal 1998 period.
The Company has a bank line of credit facility (the "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 in the
Facility. Interest is charged on the outstanding principal at LIBOR plus 175
basis points. The Company presently has no outstanding balance under the
Facility. The Facility terminates June 30, 1998. The Company has received a
proposal from a lender relating to a working capital line of credit facility of
up to $10 million, based on specified percentages of eligible accounts
receivable and inventory, and is currently in discussions with the lender
concerning this proposal. There can be no assurance that the Company will enter
into a definitive agreement with respect to this proposal.
The Company believes its existing cash balances, internally generated
funds from operations and its available bank line of credit will provide the
liquidity necessary to satisfy the Company's working capital needs, including
the growth in inventory and accounts receivable balances, and to finance
anticipated capital expenditures for the foreseeable future.
8
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party, nor are any such proceedings known by the
Company to be contemplated by governmental authorities.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF EXHIBITS.
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company*
3.2 By-Laws of the Company **
4.1 Specimen Common Stock Certificate ***
27 Financial Data Schedule (SEC use only)
* Filed with the Company's Registration Statement on Form S-1
(Registration No. 333-7477), filed on July 2, 1996, and
incorporated herein by reference.
** Filed with the Company's Annual Report on Form 10-K filed on May 28,
1997 and incorporated herein by reference.
*** Filed with Amendment No. 2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-7477), filed on August 5, 1996, and
incorporated herein by reference.
(b) REPORTS ON FORM 8-K.
There were no Current Reports on Form 8-K filed by the Company during
its fiscal quarter ended May 31, 1997.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Q.E.P. CO., INC.
Dated: July 11, 1997 By: /S/LEWIS GOULD
--------------
Lewis Gould, President
(Duly Authorized Officer)
Dated: July 11, 1997 By: /S/MARC P. APPLEBAUM
--------------------
Marc P. Applebaum
(Chief Financial Officer; Treasurer)
10
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3.1 Certificate of Incorporation of the Company*
3.2 By-Laws of the Company **
4.1 Specimen Common Stock Certificate ***
27 Financial Data Schedule (SEC use only) *1
- --------------
* Filed with the Company's Registration Statement on Form S-1
(Registration No. 333-7477), filed on July 2, 1996, and
incorporated herein by reference.
** Filed with the Company's Annual Report on Form 10-K filed on May 28,
1997 and incorporated herein by reference.
*** Filed with Amendment No. 2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-7477), filed on August 5, 1996, and
incorporated herein by reference.
*1 Filed electronically pursuant to Item 401 of Regulation S-T.
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 4,225,614
<SECURITIES> 0
<RECEIVABLES> 5,341,741
<ALLOWANCES> (61,000)
<INVENTORY> 5,927,719
<CURRENT-ASSETS> 16,253,775
<PP&E> 618,273
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,363,273
<CURRENT-LIABILITIES> 3,227,503
<BONDS> 0
0
336,660
<COMMON> 2,655
<OTHER-SE> 13,651,643
<TOTAL-LIABILITY-AND-EQUITY> 17,363,273
<SALES> 9,545,904
<TOTAL-REVENUES> 9,545,904
<CGS> 5,889,520
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (45,121)
<INCOME-PRETAX> 860,461
<INCOME-TAX> 333,580
<INCOME-CONTINUING> 524,881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 524,881
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
