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: August 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 October 10, 1997: 2,654,894 shares of common stock,
par value $.001 per share.
1
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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)
August 31, 1997 and February 28, 1997................................................. 3
Consolidated Statements of Income (Unaudited)
For the Six and Three Months Ended August 31, 1997 and 1996........................... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended August 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
Item 3 - Qualitative and Quantitative Disclosures about Market Risk............................. 9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K....................................................... 10
Signatures...................................................................................... 11
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997 AND FEBRUARY 28, 1997
(UNAUDITED)
AUGUST 31, 1997 FEBRUARY 28, 1997
--------------- -----------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents................... $ 4,333,973 $ 4,901,131
Accounts receivable, less allowance for
doubtful accounts of $61,100 at
August 31, 1997 and February 28, 1997.... 4,706,414 5,507,809
Inventories................................. 6,267,784 4,696,400
Other current assets........................ 994,138 425,578
-------------- --------------
Total current assets..................... $ 16,302,309 15,530,918
PROPERTY AND EQUIPMENT - net..................... 638,942 415,064
DEFERRED INCOME TAXES............................ 204,900 248,000
OTHER ASSETS..................................... 335,647 240,005
-------------- --------------
$ 17,481,798 $ 16,433,987
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities.... $ 2,905,035 $ 2,792,049
Other current liabilities................... 17,330 43,968
-------------- --------------
Total current liabilities................ 2,922,365 2,836,017
OTHER LIABILITIES................................ 134,194 144,893
COMMITMENTS......................................
STOCKHOLDERS' EQUITY:
Preferred stock, 2,500,000 shares
authorized, $1.00 par value; 336,660
shares issued and outstanding at
August 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
August 31, and February 28, 1997......... 2,655 2,655
Additional paid-in capital.................. 8,485,519 8,433,719
Retained earnings........................... 5,658,305 4,737,943
Cost of stock held in treasury.............. (57,900) (57,900)
-------------- --------------
$ 17,481,798 $ 16,433,987
============== ==============
</TABLE>
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 SIX MONTHS AND THREE MONTHS ENDED AUGUST 31, 1997 AND 1996
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
----------------------------- ------------------------------
August 31, August 31, August 31, August 31,
1997 1996 1997 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales...................................$ 17,388,257 $ 15,943,639 $ 7,842,353 $ 8,241,494
Cost of goods sold.......................... 10,868,872 10,107,669 4,979,352 5,305,900
------------- ------------ ------------ ------------
Gross profit............................. 6,519,385 5,835,970 2,863,001 2,935,594
Costs and expenses
Shipping................................. 1,379,807 1,115,324 639,553 539,921
General and administrative............... 1,859,890 1,602,186 828,747 845,841
Selling and marketing.................... 1,881,636 1,615,465 814,752 797,626
Foreign exchange losses, net............. 4,442 2,222 1,679 2,222
------------- ------------ ------------ ------------
5,125,775 4,335,197 2,284,731 2,185,610
------------- ------------ ------------ ------------
Operating income......................... 1,393,610 1,500,773 578,270 749,984
Interest income (expense)................... 115,180 (77,508) 70,059 (33,636)
------------- ------------ ------------ ------------
Income before provision for income taxes. 1,508,790 1,423,265 648,329 716,348
Provision for income taxes.................. 588,428 539,200 252,848 271,700
------------- ------------ ------------ ------------
NET INCOME...............................$ 920,362 $ 884,065 $ 395,481 $ 444,648
============= ============ ============ ============
Primary and fully diluted net income
per common share......................... $0.34 $0.58 $0.15 $0.30
============= ============ ============ ============
Weighted average number of shares
outstanding.......................... 2,664,567 1,500,000 2,670,510 1,500,000
============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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Q.E.P. C O., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 1997 AND 1996
(UNAUDITED)
SIX MONTHS ENDED
--------------------------------------
AUGUST 31, 1997 AUGUST 31, 1996
--------------- ---------------
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Cash flows from operating activities
Net income............................... $ 920,362 $ 884,065
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization......... 44,131 59,718
Amortization of fair market value in excess
of cost of business acquired........ (15,000) (15,000)
Deferred income taxes................. 43,100 0
Stock option compensation:............ 51,800 0
Accounts receivable................... 801,395 (268,918)
Inventories........................... (1,571,384) (694,636)
Other current assets.................. (568,560) 120,092
Other assets.......................... (98,633) (255,379)
Accounts payable and accrued liabilities 90,649 166,657
----------- -----------
Net cash used in operating activities. (302,140) (3,401)
----------- -----------
Cash flows from investing activities
Capital expenditures............................. (265,018) (22,109)
----------- -----------
Net cash used in investing activities. (265,018) (22,109)
----------- -----------
Cash flows from financing activities
Net borrowings under line of credit...... -0- 82,970
Net borrowings of debt................... -0- 18,457
Cash overdraft........................... -0- 219,050
Dividends................................ -0- (7,448)
Payment of deferred offering costs....... -0- (270,317)
----------- -----------
Net cash provided by financing activities -0- 42,712
----------- -----------
NET INCREASE (DECREASE) IN CASH....... $ (567,158) $ 17,202
Cash and cash equivalents at beginning of 4,901,131 179,138
period ----------- -----------
Cash and cash equivalents at end of period $ 4,333,973 $ 196,340
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION.:
Interest paid............................ $ -0- $ 84,187
=========== ===========
Income taxes paid........................ $ 638,500 $ 315,096
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
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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 six and three months ended August
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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AUGUST 31, 1997 FEBRUARY 28, 1997
--------------- -----------------
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Raw materials and work-in-process........... $ 692,097 $ 580,767
Finished goods.............................. 5,575,687 4,115,633
------------- -------------
$ 6,267,784 $ 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" (SFAS 128), 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.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). The Company
will implement SFAS 130 and SFAS 131 as required in fiscal 1999, which requires
the Company to report and display certain information related to comprehensive
income and operating segments, respectively. The effect of adopting SFAS 130 and
SFAS 131 is not expected to be material to the Company's consolidated financial
statements or notes to consolidated financial statements.
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ITEM 2. 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
SIX MONTHS ENDED AUGUST 31, 1997 COMPARED TO SIX MONTHS ENDED
AUGUST 31, 1996
Net sales for the six months ended August 31, 1997 (the "fiscal 1998
period") were approximately $17,388,000, compared to approximately $15,944,000
for the six months ended August 31, 1996 (the "fiscal 1997 period"), an increase
of $1,444,000 or 9.1%. 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 sales of new products introduced since the end of the fiscal 1997
period.
Gross profit for the fiscal 1998 period was approximately $6,519,000,
compared to approximately $5,836,000 for the fiscal 1997 period, an increase of
$683,000 or 11.7%. As a percentage of net sales, gross profit increased to 37.5%
in the fiscal 1998 period from 36.6% 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
$1,380,000, compared to approximately $1,115,000 for the fiscal 1997 period, an
increase of $265,000 or 23.8%. As a percentage of net sales, these expenses
increased to 7.9% in the fiscal 1998 period from 7.0% in the fiscal 1997 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 $1,860,000, compared with approximately $1,602,000 for the fiscal
1997 period, an increase of $258,000 or 16.1%. As a percentage of net sales,
these expenses increased to 10.7% 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 including
additional personnel and expansion of the Company's corporate headquarters.
Selling and marketing costs for the fiscal 1998 period were
approximately $1,882,000, compared to approximately $1,615,000 for the fiscal
1997 period, an increase of $267,000 or 16.5%. As a percentage of net sales,
these expenses increased to 10.8% in the fiscal 1998 period from 10.1% in the
fiscal 1997 period. The increase was primarily attributable to the hiring of
additional personnel, including 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
$115,000, compared to interest expense, net, of approximately $78,000 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 $588,000 in the fiscal
1998 period, compared to approximately $539,000 in the fiscal 1997 period, an
increase of $49,000 or 9.1%. This increase is attributable to the increase in
the Company's effective tax rate from 37.9%
7
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in the fiscal 1997 period to 39% in the fiscal 1998 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 approximately $920,000 from approximately $884,000 in the fiscal
1997 period, an increase of $36,000 or 4.1%. This represents a decrease in net
income as a percentage of net sales to 5.3% in the fiscal 1998 period from 5.5%
in the fiscal 1997 period.
THREE MONTHS ENDED AUGUST 31, 1997 COMPARED TO THREE MONTHS ENDED
AUGUST 31, 1996.
Net sales for the three months ended August 31, 1997 (the "fiscal 1998
period") were approximately $7,842,000, compared to approximately $8,241,000 for
the three months ended August 31, 1996 (the "fiscal 1997 period"), a decrease of
$399,000 or 4.8%. The decrease is primarily a result of a decrease in orders
from two of the Company's home center customers who reduced their inventory
levels and, as a result their orders, in anticipation of a merger of the two
companies. In addition, during the fiscal 1998 period, one of the Company's
customers ceased operations. This customer had accounted for approximately 4.9%
of the Company's net sales during the fiscal 1997 period.
Gross profit for the fiscal 1998 period was approximately $2,863,000,
compared to approximately $2,936,000 in the fiscal 1997 period, a decrease of
$73,000 or 2.5%. The decrease in gross profit was due to the decrease in sales
although gross profit, as a percentage of sales, increased to 36.5% in the
fiscal 1998 period from 35.6% in the fiscal 1997 period.
Shipping expenses for the fiscal 1998 period were approximately
$640,000, compared to approximately $540,000 for the fiscal 1997 period, an
increase of $100,000 or 18.5%. As a percentage of net sales, these expenses
increased to 8.2% in the fiscal 1998 period from 6.6% in the fiscal 1997 period.
The increase was primarily due to additional labor costs and increased freight
rates charged by common carriers.
General and administrative expenses for the fiscal 1998 period were
approximately $829,000, compared to approximately $846,000 for the fiscal 1997
period, a decrease of $17,000 or 2.0%. Although the dollar amount remained
relatively constant, general and administrative expenses, as a percentage of net
sales, increased to 10.6% in the fiscal 1998 period from 10.3% in the fiscal
1997 period, due to a decrease in net sales.
Selling and marketing costs for the fiscal 1998 period were
approximately $815,000, compared to approximately $798,000 for the fiscal 1997
period, an increase of $17,000 or 2.1%. As a percentage of net sales, these
expenses increased to 10.4% in the fiscal 1998 period from 9.7% in the fiscal
1997 period. The increase was primarily attributable to additional personnel and
an increase in Company's marketing programs.
Interest income, net, for the fiscal 1998 period was approximately
$70,000, compared to interest expense of approximately $34,000 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
proceeds of the Company's initial public offering in fiscal 1997.
Provision for income taxes was approximately $253,000 in the fiscal
1998 period, compared to approximately $272,000 for the fiscal 1997 period, a
decrease of $19,000 or 7%. This decrease is a result of a decrease in net
income, partially offset by an increase in the Company's effective tax rate from
37.9% in the fiscal 1997 period to 39% in the fiscal 1998 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 was
approximately $396,000, compared to approximately $445,000 for the fiscal 1997
period, a decrease of $49,000 or 11%. This represents a decrease in net income
as a percentage of net sales to 5.0% in the fiscal 1998 period from 5.4% in the
fiscal 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of August 31, 1997 increased from approximately
$12,695,000 at February 28, 1997 to approximately $13,380,000, an increase of
$685,000, primarily as a result of net income during the six months ended August
31, 1997. 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.
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Net cash used in operating activities during the six month period ended
August 31, 1997 was approximately $302,000 compared to approximately $3,400 for
the comparable period in fiscal 1997. The increase in cash used in operating
activities was primarily due to an increase in inventory and other current
assets offset by a decrease in receivables. Net cash used in investing
activities was approximately $265,000 compared to approximately $22,000 for the
comparable period in fiscal 1997, primarily due to the purchase of manufacturing
equipment.
Net cash provided by financing activities was $0 compared to
approximately $43,000 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.
During the second quarter, the Company amended its existing bank line of
credit facility (the "Facility") which permits it to borrow up to $10,000,000 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 125 basis points. The Company presently has no
outstanding balance under the Facility. The Facility terminates July 25, 2000.
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.
ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
9
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PART II - OTHER INFORMATION
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 ***
10.3.2 First Amendatory Agreement to Revolving Loan and Security
Agreement, dated as of July 25, 1997, by and among Q.E.P.
Co., Inc. and its subsidiaries and Fleet National Bank
(f/k/a Shawmut Bank Connecticut, N.A.), including Amended
and Restated Revolving Promissory Note dated July 25, 1997
and Release of Limited Guaranty of Lewis Gould, dated
July 25, 1997.
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 August 31, 1997.
10
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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: October 14, 1997 By: /S/ LEWIS GOULD
---------------
Lewis Gould, President
(Duly Authorized Officer)
Dated: October 14, 1997 By: /S/ MARC P. APPLEBAUM
---------------------
Marc P. Applebaum
(Chief Financial Officer; Treasurer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
10.3.2 First Amendatory Agreement to Revolving Loan and Security Agreement,
dated as of July 25, 1997, by and among Q.E.P. Co., Inc. and its
subsidiaries and Fleet National Bank (f/k/a Shawmut Bank Connecticut,
N.A.), including Amended and Restated Revolving Promissory Note dated
July 25, 1997 and Release of Limited Guaranty of Lewis Gould, dated
July 25, 1997.
27 Financial Data Schedule *1
- -------------
*1 Filed electronically pursuant to Item 401 of Regulation S-T.
12
EXHIBIT 10.3.2
FIRST AMENDATORY AGREEMENT TO
REVOLVING LOAN AND SECURITY AGREEMENT
THIS AGREEMENT made as of the 25th day of July, 1997, by and between Q.E.P.
CO., INC., a Delaware corporation with its chief executive office and principal
place of business at 1081 Holland Drive, Boca Raton, Florida 33487, Q.E.P. -
O'TOOL, Inc., a California corporation with its chief executive office and
principal place of business at 20535 Belshaw Avenue, Carson, California 90746,
AMERICAN TROWEL AND FLOAT COMPANY, INC., A Florida corporation with its chief
executive office and principal place of business at 2511 N.E. 4th Avenue,
Pompano Beach, Florida 33064, MARION TOOL CORPORATION, an Indiana corporation
with its chief executive office and principal place of business at 11th Street
and Miller Avenue, Marion, Indiana 46952, WESTPOINT FOUNDRY, INC., an Indiana
corporation with its chief executive office and principal place of business at
11th Street and Miller Avenue, Marion, Indiana 46952, and Q.E.P. ANDREWS, INC.,
a Nevada corporation with its chief executive office and principal place of
business at 35 Stokes Drives, Carson City, Nevada (all of the foregoing
hereinafter collectively called the "BORROWER" unless otherwise specifically
indicated) and FLEET NATIONAL BANK f/k/a SHAWMUT BANK CONNECTICUT, N.A., a
national banking association with an office at One Landmark Square, Stamford,
Connecticut 06901 (hereinafter referred to as the "Lender").
WITNESSETH:
WHEREAS, the Borrower and the Lender have entered into a Revolving Loan and
Security Agreement dated October 13, 1995 (as amended from time to time the
"LOAN AGREEMENT"); and
WHEREAS, the Borrower and the Lender desire to amend the Loan Agreement as
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter contained, the Borrower and the Lender hereby agree as follows:
1. Section 2.1 of the Loan Agreement is hereby deleted and the following is
inserted in lieu thereof:
"2.1 REVOLVING LOAN. The Lender may loan to the Borrower, at its
discretion, and the Borrower may borrow, repay, and reborrow from the
Lender, from time to time (the "REVOLVING LOAN"), up to that amount
(hereinafter referred to as the "BORROWING BASE") which is the lesser
of:
a. The sum of:
(1) EIGHTY PERCENT (80%) of the Borrower's Eligible Receivables:
AND
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(2) FIFTY PERCENT (50%) of the Borrower's Eligible Inventory, OR
b. TEN MILLION DOLLARS ($10,000,000).
Nothing shall prohibit the Lender from lending in excess of the
Borrowing Base, all loans to be at the discretion of the Lender."
2. The first two sentences of Section 2.3 of the Loan Agreement are hereby
deleted and the following is inserted in lieu thereof:
"2.3 REPAYMENT OF THE REVOLVING LOANS. The Revolving Loan shall be payable
on the Termination Date, without requiring the Lender first to resort
to any other right, remedy or security. In the event the Revolving
Loan plus the aggregate undrawn face amount of all letters of credit
issued, extended or renewed for the account of the Borrower at any
item exceeds the Borrowing Base, the Borrower will immediately, upon
notification thereof from the Lender, repay to the Lender the amount
by which the Revolving Loan plus such aggregate undrawn face amount
exceeds the Borrowing Base."
3. The second and third full paragraphs of Section 2.4 of the Loan
Agreement are hereby deleted and the following is inserted in lieu thereof:
"The Revolving Loan shall bear interest on the unpaid principal amount
thereof outstanding from time to time at a rate per annum (computed on the
basis of the actual number of days elapsed over a year of 360 days) equal
to:
a. The Lender's Prime Rate
(the "PRIME RATE OPTION") or
b.
i. the LIBOR Rate plus
ii. 125 basis points, all as hereinafter set forth
(the "LIBOR BASED RATE")
but in no event higher than the maximum rate of interest permitted to be
collected by the holder of the Revolving Note under applicable law.
As to the Prime Rate Option, in the event the Lender's Prime Rate
prevailing on the effective date hereof is subsequently increased or
decreased, then as of the date of said increase or decrease, an increase or
decrease will be made in the rate of interest which will be charged to
Borrower in respect of the Revolving Loan so that the interest rate shall
at all times be
-2-
<PAGE>
equal to the Lender's Prime Rate, subject to the aforesaid limitation based
on applicable law. The Lenders "PRIME RATE" shall mean the interest rate
announced from time to time by the Lender as its prime rate. The Prime Rate
is not necessarily the lowest rate available. The Lender shall not be
obligated to notify the Borrower of any change in the Prime Rate or the
interest rate payable in respect of the Revolving Loan, and a failure to
so notify shall not affect the effectiveness of the change in rate.
Any references in this Loan Agreement to the Base Rate shall be deemed to
refer to the Prime Rate."
4. The first sentence of Subsection (ii) following the fourth full
paragraph of Section 2.4 is hereby deleted and the following inserted in lieu
thereof:
"(ii) LIBOR Based Rate Loans shall be selected (by notice to Lender not
less than 2 days prior to commencement of the proposed LIBOR Interest
Period) for a period of either thirty (30), sixty (60) or ninety (90) days'
duration, as the Borrower may elect, during which the LIBOR Based Rate is
applicable ("LIBOR INTEREST PERIOD"); provided, however, that (a) if the
LIBOR Interest Period would otherwise end on a day which shall not be a
Good Business Day, such LIBOR Interest Period shall be extended to the next
succeeding Good Business Day, unless such Good Business Day falls in
another calendar month, in which case such LIBOR Interest Period shall end
on the next preceding Good Business Day subject to clause (c) below; (b)
interest shall accrue from and including the first day of each LIBOR
Interest Period to, but excluding the day on which any LIBOR Interest
Period expires; and (c) with respect to any LIBOR Interest Period which
begins on the last Good Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at
the end of such LIBOR Interest Period), the LIBOR Interest Period shall end
on the last Good Business Day of a calendar month."
5. The following paragraphs are inserted at the conclusion of Section 2.4:
"In the event Borrower completes an acquisition, LIBOR Based Rate Loans
shall bear interest for thirty (30), sixty (60) or ninety (90) day LIBOR
Interest Periods at a rate per annum equal to (i) the LIBOR Rate plus (ii)
the LIBOR Spread, as set forth in the following table:
-3-
<PAGE>
SR. DEBT/TRAILING EBITDA/ LIBOR SPREAD
12 MOS. EBITDA DEBT SERVICE
(DETERMINED PURSUANT TO (DETERMINED PURSUANT TO
PARAGRAPH 14 OF EXHIBIT A PARAGRAPH 13 OF EXHIBIT A
TO THE LOAN AGREEMENT) TO THE LOAN AGREEMENT)
/greater than/ 3.5x 1.25x-1.50x 200 basis points
3.5x-3.0x AND 1.51x-2.25x 175 basis points
2.9x-2.0x 2.26x-2.50x 150 basis points
/less than/ 2.5x /greater than/ 2.50x 125 basis points
Changes in the LIBOR Spread resulting from a change in the above ratios
shall become effective on the due date of delivery by the Borrower of a
compliance certificate evidencing such change. If the Borrower shall fail
to timely deliver a compliance certificate in accordance with this
Agreement, the LIBOR Spread shall be 200 basis points from the day such
certificate was due until the day a certificate evidencing a lower LIBOR
Spread is actually delivered to the Lender. If a compliance certificate
evidences ratios as to which different LIBOR Spreads apply, the LIBOR
Spread shall be the higher of the two applicable choices."
6. The first sentence of Section 2.9 of the Loan Agreement is hereby
deleted and the following is inserted in lieu thereof:
"2.9 TERMINATION. The Loan Agreement shall terminate on July 25, 2000 (the
"TERMINATION DATE") and may, on July 1 of every year prior to the
Termination Date, be renewed by the Lender for an additional two years (so
that after giving affect to each such renewal, the Termination Date would
be four years from the date of such renewal) in its sole and absolute
discretion, only upon written notification by the Lender to the Borrower
which notification will contain the terms and conditions of the renewal."
7. The following new sections are hereby inserted following Section 2.10 of
the Loan Agreement:
"2.11 UNUSED LINE FEE. The Borrower shall pay to the Lender, quarterly in
arrears on the first day of each fiscal quarter, an unused line fee equal
to one-quarter of one percent (1/4%) per annum of the average daily
unused balance of the Revolving Credit Loan during the immediately
preceding fiscal quarter.
2.12 LETTER OF CREDIT PRICING. In the event that the Lender issues, extends
or renews any letters of credit for the account of the Borrower (whether
collectively or individually), the Borrower shall pay to the Lender on the
date of such issuance, extension of
-4-
<PAGE>
renewal and on each anniversary date thereof, a fee of one and one-half
percent (1.5%) per annum on the face amount of such letter of credit. The
Borrower shall also pay the Lender's usual and customary administration and
negotiation fees with respect to such letter of credit."
8. The following new subsection is hereby inserted in Section 4.1 of the
Loan Agreement following subsection 4.1 m. thereof:
"n. The Borrower shall maintain its principal operating accounts at a
banking subsidiary of Fleet Financial Group."
9. Subsection 5.1(j) of the Loan Agreement is hereby deleted and the
following is inserted in lieu thereof:
The occurrence of any of the following: (i) the sale or other transfer of
all or substantially all of the assets of the Borrower, (ii) any
transaction (including a merger or consolidation) the result of which is
that any "person" or "group" (within the meaning of Section 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) becomes the "beneficial owner" (within the meaning of Rule 13d-3
under the Exchange Act) of more than thirty-five percent (35%) (calculated
on a fully diluted basis) of the voting power of all classes of voting
stock of the Borrower and/or warrants or options to acquire such voting
stock, (iii) the adoption of a plan relating to the liquidation or
dissolution of the Borrower, or (iv) the first day on which a majority of
the members of the Board of Directors of the Borrower cease to be
Continuing Directors (meaning the directors of the Borrower on the date
hereof and each other director, if such director's nomination for election
to the Board of Directors of the Borrower is recommended by a majority of
the Continuing Directors at the time of such nomination or election).
10. Paragraph 2 of Exhibit A to the Loan Agreement is hereby deleted and
the following is inserted in lieu thereof:
"2. Intentionally Omitted."
11. Paragraph 8 of Exhibit A to the Loan Agreement is hereby deleted and
the following is inserted in lieu thereof:
"MINIMUM TANGIBLE NET WORTH REQUIREMENT. The Borrower shall maintain a
tangible net worth of not less than TEN MILLION DOLLARS ($10,000,000) as
of the end of each fiscal quarter of the Borrower. For purposes of this
paragraph, the term "TANGIBLE NET WORTH" shall mean total assets less total
liabilities, excluding from the determination of total assets (i) all
assets which would be classified as intangible assets, including, without
limitation, goodwill, patents, trademarks, trade names, copyrights and
franchises, (ii) any amounts due
-5-
<PAGE>
to the Borrower from affiliates, employees, officers or stockholders, and
(iii) increases caused by a write-up of assets of the Borrower."
12. Paragraph 9 of Exhibit A to the Loan Agreement is hereby deleted and
the following is inserted in lieu thereof:
"9. INTEREST COVERAGE RATIO. The Borrower shall maintain a minimum
Interest Coverage Ratio of 2.5 to 1.0 as of the end of each fiscal
quarter of the Borrower. For purposes of this paragraph, "INTEREST
COVERAGE RATIO" shall mean earnings (before interest and taxes)
divided by interest expense."
13. Paragraph 10 of Exhibit A to the Loan Agreement is hereby deleted and
the following is inserted in lieu thereof:
"10. Intentionally Omitted."
14. The following new paragraphs are hereby inserted following paragraph 11
of Exhibit A to the Loan Agreement:
"12. CURRENT RATIO. The Borrower shall maintain a ratio of (i) current
assets to (ii) current liabilities of not less than 1.2 : 1.0 as of
the end of each fiscal quarter of the Borrower.
13. DEBT SERVICE COVERAGE RATIO. The Borrower shall maintain a ratio of
(i) earnings before interest, taxes, depreciation and amortization
MINUS capital expenditures to (ii) current maturities of long term
debt PLUS interest expense of not less than 2.0 : 1.0 on a rolling
four quarter basis as of the end of each fiscal quarter of the
Borrower.
14. SENIOR DEBT TO TRAILING EBITDA RATIO. The Borrower shall maintain a
ratio of (i) senior bank debt to (ii) trailing earnings before
interest, taxes, depreciation and amortization of not more than 3.0 :
1.0 on a rolling four quarter basis as of the end of each fiscal
quarter of the Borrower."
15. Exhibit B to the Loan Agreement is hereby deleted in its entirety and
in lieu thereof a new Exhibit B is inserted in the form attached hereto as
Exhibit B.
16. The effectiveness of this First Amendatory Agreement shall be
conditional upon:
a. The execution and delivery by Borrower to Lender of an Amended and
Restated Revolving Promissory Note in the form of Exhibit B attached hereto: and
b. The execution and delivery of this First Amendatory Agreement by
Borrower and Lender.
-6-
<PAGE>
17. All other terms and conditions of the Loan Agreement are hereby
ratified, continued and confirmed and nothing contained herein shall operate to
release the Borrower from its liability to pay the Obligations and to keep and
perform the terms, conditions, obligations and agreements contained in all
documents relating to and securing repayment of the Loan Agreement, except as
herein modified, and the Borrower agrees to pay the indebtedness evidenced and
secured by the Loan Agreement with interest and all other payments required to
be made by the Loan Agreement in accordance with the provisions thereof, except
as herein modified, and the Borrower further agrees that every provision,
obligation, right and power contained in and under the Loan Agreement and said
related documents shall continue in full force and effect affected only to the
extent of the changes herein set forth.
18. The Borrower hereby acknowledges and agrees that it is indebted to the
Lender as set forth in the Loan Agreement as modified hereby and that the
Borrower has no defense, offset, recoupment or counterclaim with respect thereto
all of which are hereby waived. The Borrower hereby releases the Lender from any
and all liability arising directly or indirectly with respect to the Loan
Agreement, the debt evidenced or governed thereby and any and all actions taken
by the Lender with respect to the transactions contemplated therein.
19. All capitalized terms not otherwise defined herein shall have the
meaning ascribed to them in the Loan Agreement.
20. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original and all of them shall constitute one and
the same agreement.
21. This Agreement shall be governed by the internal substantive laws of
the State of Connecticut without regard to principles of conflicts of laws.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by the proper and duly authorized officers as of the date
and year first above written.
WITNESS: BORROWER:
Q.E.P. CO., INC.
/s/ ELLEN KANOWSKY
- ------------------------
Ellen Kanowsky
CONTROLLER By /s/ MARC APPLEBAUM
-------------------------
Marc Applebaum
Its CFO
Duly Authorized
-7-
<PAGE>
Q.E.P. - O'TOOL, INC.
/s/ ELLEN KANOWSKY
- ------------------------ By /s/ MARC APPLEBAUM
Ellen Kanowsky -------------------------
CONTROLLER Marc Applebaum
Its CFO
Duly Authorized
AMERICAN TROWEL AND FLOAT
COMPANY, INC.
/s/ ELLEN KANOWSKY
- ------------------------ By /s/ MARC APPLEBAUM
Ellen Kanowsky -------------------------
CONTROLLER Marc Applebaum
Its CFO
Duly Authorized
MARION TOOL CORPORATION
/s/ ELLEN KANOWSKY
- ------------------------ By /s/ MARC APPLEBAUM
Ellen Kanowsky -------------------------
CONTROLLER Marc Applebaum
Its CFO
Duly Authorized
Q.E.P. ANDREWS, INC.
/s/ ELLEN KANOWSKY
- ------------------------ By /s/ MARC APPLEBAUM
Ellen Kanowsky -------------------------
CONTROLLER Marc Applebaum
Its CFO
Duly Authorized
WESTPOINT FOUNDRY, INC.
/s/ ELLEN KANOWSKY
- ------------------------ By /s/ MARC APPLEBAUM
Ellen Kanowsky -------------------------
CONTROLLER Marc Applebaum
Its CFO
Duly Authorized
-8-
<PAGE>
LENDER
FLEET NATIONAL BANK F/K/A
SHAWMUT BANK CONNECTICUT, N.A.
/s/ Dennis Hultgren
- ------------------------
Dennis Hultgren
/s/ Matthew Bourgeouis By /s/ ANTHONY MCKIERNAN
- ------------------------ ---------------------------
Matthew Bourgeouis Anthony McKiernan
Its Assistant Vice President
Duly Authorized
-9-
<PAGE>
AMENDED AND RESTATED REVOLVING PROMISSORY NOTE
$10,000,000.00 Stamford, Connecticut
July 25, 1997
Q.E.P. CO., INC., a Delaware corporation with its chief executive office
and principal place of business at 1081 Holland Drive, Boca Raton, Florida
33487, Q.E.P. - O'TOOL, INC., a California corporation with its chief executive
office and principal place of business at 20535 Belshaw Avenue, Carson,
California 90746, AMERICAN TROWEL AND FLOAT COMPANY, INC., A Florida corporation
with its chief executive office and principal place of business at 2511 N.E. 4th
Avenue, Pompano Beach, Florida 33064, MARION TOOL CORPORATION, an Indiana
corporation with its chief executive office and principal place of business at
11th Street and Miller Avenue, Marion, Indiana 46952, WESTPOINT FOUNDRY, INC.,
an Indiana corporation with its chief executive office and principal place of
business at 11th Street and Miller Avenue, Marion, Indiana 46952, and Q.E.P.
ANDREWS, INC., a Nevada corporation with its chief executive office and
principal place of business at 35 Stokes Drive, Carson City, Nevada (all of the
foregoing hereinafter collectively called the "Borrower" unless otherwise
specifically indicated), for value received, promises to pay to the order of
FLEET NATIONAL BANK (f/k/a SHAWMUT BANK CONNECTICUT, N.A.), a national banking
association (hereinafter referred to as the "Lender") at its office at One
Landmark Square, Stamford, Connecticut 06901 or at such other place as the
holder of this Note may from time to time designate in writing, on or before the
Termination Date (as such term is defined in the Loan Agreement), the principal
sum of TEN MILLION DOLLARS ($10,000,000), or such lesser amount as has been
advanced and remains outstanding under this Note, with interest computed as set
forth in a certain Revolving Loan and Security Agreement between the Borrower
and the Lender dated October 13, 1995 (as amended from time to time the "LOAN
AGREEMENT") from the date hereof until this Note is fully paid.
All payments will be applied first to the payment of late charges, then to
accrued and unpaid interest and the balance on account of the unpaid principal
of this Note.
All sums due under this Note shall be payable together with all lawful
taxes and assessments levied thereon, or upon this Note, or upon the holder
hereof with respect to the same.
The happening of any of the following events or conditions shall constitute
an "Event of Default" under this Note:
1. Failure to make when due any payment of principal or interest or any sum
due under this Note when the same shall be due and payable.
2. The occurrence of an Event of Default or notice of termination under the
Loan agreement.
<PAGE>
Upon and after the occurrence of an Event of Default, the whole of said
indebtedness, both principal and interest, and including any other sums which
may become due under this Note, shall, at the option of the holder of this Note,
immediately become due and payable without presentment, demand, protest, notice
of protest, or other notice or notice of dishonor of any kind, all of which are
hereby expressly waived by the Borrower.
The Borrower agrees that no delay or failure on the part of the holder in
exercising any power, privilege, remedy, option or right under this Note shall
operate as a waiver thereof or of any other power, privilege, remedy or right;
nor shall any single or partial exercise of any power, privilege, remedy, option
or right hereunder preclude any other or future exercise thereof or the exercise
of any other power, privilege, remedy, option or right. The rights and remedies
expressed herein are cumulative, and may be enforced successively, alternately,
or concurrently and are not exclusive of any rights or remedies which holder may
or would otherwise have under the provisions of all applicable laws, and under
the provisions of all agreements between the Borrower and the Lender.
The Borrower hereby waives presentment; demand, notice, protest and all
other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, assents to any extension or
postponement of the time of payment or any other indulgence and/or to the
addition or release of any party or person primarily or secondarily liable.
The Borrower gives the Lender a lien and right of setoff for all of
Borrower's liabilities upon and against the Borrower's deposits, credits and
property, now or hereafter in the possession or control of the Lender or in
transit to it. The Lender may, at any time, apply the same or any part thereof,
to any of the Borrower's liability, though unmatured, without notice and without
first resorting to any other collateral.
This Note shall be governed by and construed in accordance with the laws of
the State of Connecticut.
This Note constitutes the amendment and restatement in its entirety of the
Revolving Promissory Note of the Borrower to the Lender in the principal amount
of $3,250,000 dated October 13, 1995 (the "ORIGINAL NOTE"), and is in
substitution therefor and an amendment and replacement thereof. Nothing herein
or in any other document shall be construed to constitute payment of the
Original Note or to release or terminate any guaranty or any lien, mortgage,
pledge or other security interest in favor of the Lender.
2
<PAGE>
This Note is the Revolving Promissory Note referred to in, entitled to the
benefits of, and subject to the terms and conditions of the Loan Agreement.
Q.E.P. CO., INC.
By:/s/ MARC APPLEBAUM
----------------------
Marc Applebaum
Its CFO
Duly Authorized
Q.E.P. - O'TOOL, INC.
By:/s/ MARC APPLEBAUM
----------------------
Marc Applebaum
Its CFO
Duly Authorized
AMERICAN TROWEL AND FLOAT
COMPANY, INC.
By:/s/ MARC APPLEBAUM
----------------------
Marc Applebaum
Its CFO
Duly Authorized
MARION TOOL CORPORATION
By:/s/ MARC APPLEBAUM
----------------------
Marc Applebaum
Its CFO
Duly Authorized
3
<PAGE>
WESTPOINT FOUNDRY, INC.
By:/s/ MARC APPLEBAUM
----------------------
Marc Applebaum
Its CFO
Duly Authorized
Q.E.P. ANDREWS, INC.
By:/s/ MARC APPLEBAUM
----------------------
Marc Applebaum
Its CFO
Duly Authorized
4
<PAGE>
July 25, 1997
Mr. Lewis Gould
2916 South Ocean Boulevard
Highland Beach, FL 33487
Re: Q.E.P. Co., Inc., et al
Dear Mr. Gould:
Reference is made to that certain Limited Guaranty executed by Lewis Gould
(the "Guarantor") on October 13, 1995 (the "Guaranty") in favor of Shawmut Bank
Connecticut, N.A. (now known as Fleet National Bank)(the "Lender"), pursuant to
which the Guarantor guaranteed the payment and performance from or by Q.E.P.
Co., Inc. Q.E.P. - O'Tool, Inc., American Trowel and Float Company, Inc.,
Westpoint Foundry, Inc., Marion Tool Corporation and Q.E.P. Andrews, Inc.
(collectively, the "Borrower") of the Obligations, as defined in the Guaranty,
from the Borrower to the Lender.
The Lender hereby releases and discharges the Guarantor from any and all
obligations to the Lender under the Guaranty. The Guarantor hereby acknowledges
that this release only extends to the Guaranty and it does not extend to any
other obligations of the Guarantor to the Lender pursuant to any other
agreements.
Very truly yours,
FLEET NATIONAL BANK
By: /s/ Anthony McKiernan
-----------------------------
Anthony McKiernan
Its Assistant Vice President
Duly Authorized
Accepted and Agreed to this
25th day of July, 1997
/s/ Lewis Gould
- --------------------------------
Lewis Gould
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<PERIOD-START> MAR-01-1997
<PERIOD-END> AUG-31-1997
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<RECEIVABLES> 4,706,414
<ALLOWANCES> (61,100)
<INVENTORY> 6,267,784
<CURRENT-ASSETS> 16,302,309
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0
336,660
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<SALES> 17,388,257
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