UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 21, 1997
Q.E.P. CO. INC
--------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
FLORIDA 0-21161 13-2983807
------- ------- ----------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
</TABLE>
1081 HOLLAND DRIVE, BOCA RATON. FL 33487
----------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 994-5550
--------------
N/A
(Former name or former address, if changed since last report)
<PAGE>
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
This Report on Form 8-K contains forward-looking statements within the
meaning of that term in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Additional written or oral
forward-looking statements may be made by the Company from time to time, in
filings with the Securities Exchange Commission or otherwise. Statements
contained herein that are not historical facts are forward-looking statements
made pursuant to the safe harbor provisions described above. Forward-looking
statements may include, but are not limited to, projections of revenues, income
or losses, capital expenditures, plans for future operations, the elimination of
losses under certain programs, financings needs or plans, compliance with
financial covenants in loan agreements, plans for sale of assets or businesses,
plans relating to products or services of the Company, assessments of
materiality, prediction of future events, and the effects of pending and
possible litigation, as well as assumptions relating to the foregoing. In
addition, when used in this discussion, the words, "anticipates," "expects,"
"plans," and variations thereof and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained herein, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unexpected events.
On November 3, 1997, the Company filed a report on Form 8-K with
respect to the stock purchase agreement between the Registrant and RCI Holdings,
Inc. At that time it was impracticable to provide the financial statements and
pro forma financial information required to be filed therewith relative to the
acquired company, and the Company stated in such Form 8-K that it intended to
file the required financial statements and proforma financial information as
soon as practicable, but no later than 60 days from the date of that filing. By
this amendment to such Form 8-K, the Company is amending and restating Item 7
thereof to include the required financial statements and pro forma financial
information.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. (RCI HOLDINGS)
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
March 31, 1997 and 1996
Consolidated Statements of Net Capital Deficiency for the
Years Ended March 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 1996 and 1995
Consolidated Statements of Operations for the Year Ended
March 31, 1996, the Three Months Ended March 31, 1995,
and the Nine Months Ended December 31, 1994
Consolidated Statements of Net Capital Deficiency for the
Year Ended March 31, 1996, the Three Months Ended March
31, 1995 and the Nine Months Ended December 31, 1994
Consolidated Statements of Cash Flows for the Year Ended March
31, 1996, the Three Months Ended March 31, 1995 and the
Nine Months Ended December 31, 1994
Notes to Consolidated Financial Statements
Interim Balance Sheet as of September 30, 1997 (Unaudited)
and March 31, 1997
Interim Statements of Income and Retained Earnings for the
Six Months Ended September 30, 1997 and 1996 (Unaudited)
Interim Statements of Cash Flows for the Six Months Ended
September 30, 1997 and 1996 (Unaudited)
Notes to Unaudited Interim Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION
Introduction to Unaudited Pro Forma Consolidated Financial
Information
Pro Forma Consolidated Balance Sheets as of August 31, 1997
(Unaudited)
Notes to Pro Forma Consolidated Balance Sheets as of
August 31, 1997 (Unaudited)
Pro Forma Consolidated Statements of Operations for the
Year ended February 28, 1997 (Unaudited)
Notes to Pro Forma Consolidated Statements of Operations
(Unaudited)
Pro Forma Consolidated Statements of Operations for the
six months ended August 31, 1997 (Unaudited)
Notes to Pro Forma Consolidated Statements of Operations
(Unaudited)
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C> <C>
2.1 Stock Purchase Agreement dated October 21, 1997
between the Registrant and RCI Holdings Previously Filed
99.1 Form of warrant issued to the following persons,
in the following amounts: Previously Filed
RCI Holdings, Inc. 100,000
Marlborough Capital Fund, Ltd. 100,000
99.2 Form of 8% Convertible Debenture issued to the
following persons in the following amounts: Previously Filed
RCI Holdings, Inc. $1,911,673.30
Marlborough Capital Fund $5,088,326.76
IBJ Schroeder as Escrow Agent $ 500,000
99.3 Escrow Agreement dated October 21, 1997 among the
Registrant, RCI Holdings, Inc. and IBJ Schroeder Previously Filed
</TABLE>
SIGNATURE
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 hereunto duly authorized.
Q.E.P. CO., INC.
(Registrant)
/s/ MARC P. APPLEBAUM
----------------------------------
By: Marc P. Applebaum
Chief Financial Officer
3
<PAGE>
RCI Holdings, Inc.
Consolidated Financial Statements
Years ended March 31, 1997 and 1996
CONTENTS
Report of Independent Auditors............................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets...............................................2
Consolidated Statements of Operations.....................................4
Consolidated Statements of Net Capital Deficiency.........................5
Consolidated Statements of Cash Flows.....................................7
Notes to Consolidated Financial Statements................................8
4
<PAGE>
Report of Independent Auditors
The Board of Directors
RCI Holdings, Inc.
We have audited the accompanying consolidated balance sheets of RCI Holdings,
Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, net capital deficiency, and cash flows
for the years then ended. 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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RCI
Holdings, Inc. and subsidiaries at March 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Riverside, California
June 10, 1997, except for Notes 5 and 11 as
to which the date is October 21, 1997
5
<PAGE>
<TABLE>
<CAPTION>
RCI Holdings, Inc.
Consolidated Balance Sheets
MARCH 31
1997 1996
---------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 114,739 $ 52,999
Accounts receivable, less allowance for doubtful
accounts of $169,000 and $193,000 in 1997 and 5,951,885 5,549,690
1996, respectively
Inventories 5,641,827 6,275,090
Prepaid expenses 186,885 151,792
---------------------------------------------
Total current assets 11,895,336 12,029,571
Buildings and building improvements 33,024 33,024
Machinery and equipment 4,669,208 4,373,861
Furniture and fixtures 832,063 724,932
Leasehold improvements 210,812 202,291
---------------------------------------------
5,745,107 5,334,108
Less accumulated depreciation and amortization 2,241,342 1,160,912
---------------------------------------------
3,503,765 4,173,196
Goodwill (net of accumulated amortization of
$730,321 and $437,881 in 1997 and 1996, respectively) 4,088,786 4,381,226
Debt issuance costs (net of accumulated amortization of
$467,779 and $276,824 in 1997 and 1996, respectively) 762,017 952,972
Investments in joint ventures 49,724 76,724
Other assets 369,355 360,810
=============================================
$ 20,668,983 $ 21,974,499
=============================================
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
MARCH 31
1997 1996
---------------------------------------------
<S> <C> <C>
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Cash overdraft $ 476,574 $ 263,780
Accounts payable 3,388,170 3,435,507
Accrued liabilities 814,880 918,988
Accrued management fee 250,000 -
Accrued interest 333,580 -
Long-term debt due within one year 887,850 782,856
---------------------------------------------
Total current liabilities 6,151,054 5,401,131
Long-term debt 14,546,301 15,191,135
Deferred tax liability 27,246 27,366
Deferred profit on sale/leaseback 384,363 480,459
Commitments and contingencies
Redeemable preferred stock, 30,000 shares authorized, 20,000 shares
issued and outstanding (liquidation preference of $2,360,000 at
March 31, 1997) 2,000,000 2,000,000
Net capital deficiency:
Common stock, $.0001 par value:
Authorized shares - 50,000
Issued and outstanding shares - 20,428 2 2
Common stock warrants 10,900 10,900
Additional paid-in capital 25,032 25,032
Foreign currency translation adjustments (55,924) 11,601
Accumulated deficit (2,419,991) (1,173,127)
---------------------------------------------
Total net capital deficiency (2,439,981) (1,125,592)
=============================================
Total liabilities and net capital deficiency $ 20,668,983 $ 21,974,499
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
<TABLE>
<CAPTION>
RCI Holdings, Inc.
Consolidated Statements of Operations
YEAR ENDED MARCH 31
1997 1996
-----------------------------------------------
<S> <C> <C>
Net sales $ 49,457,124 $ 48,546,772
Cost of sales 42,598,326 41,013,483
-----------------------------------------------
Gross profit 6,858,798 7,533,289
-----------------------------------------------
Cost and expenses:
Selling, general and administrative 6,346,332 6,619,839
Interest 1,680,821 1,696,362
-----------------------------------------------
8,027,153 8,316,201
-----------------------------------------------
Loss before provision for taxes
based on income (1,168,355) (782,912)
Provision for taxes based
on income 81,532 92,743
-----------------------------------------------
Net loss $ (1,249,887) $ (875,655)
===============================================
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
<TABLE>
<CAPTION>
RCI Holdings, Inc.
Consolidated Statements of Net Capital Deficiency
COMMON STOCK
COMMON ADDITIONAL
----------------------------------- STOCK PAID-IN
SHARES AMOUNT WARRANTS CAPITAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at April 1, 1995 20,248 $ 2 $ 10,900 $ 25,032
Net loss - - - -
Foreign currency translation
adjustments - - - -
Other - - - -
----------------------------------------------------------------------------------
Balances at March 31, 1996 20,248 2 10,900 25,032
Net loss - - - -
Foreign currency translation
adjustments - - - -
Other - - - -
----------------------------------------------------------------------------------
Balances at March 31, 1997 20,248 $ 2 $ 10,900 $ 25,032
==================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
FOREIGN
CURRENCY
TRANSLATION ACCUMULATED NET CAPITAL
ADJUSTMENTS DEFICIT DEFICIENCY
- --------------------------------------------------------------------
$ 104,020 $ (301,722) $ (161,768)
- (875,655) (875,655)
(92,419) - (92,419)
- 4,250 4,250
- --------------------------------------------------------------------
11,601 (1,173,127) (1,125,592)
- (1,249,887) (1,249,887)
(67,525) - (67,525)
- 3,023 3,023
- --------------------------------------------------------------------
$ (55,924) $ (2,419,991) $ (2,439,981)
====================================================================
10
<PAGE>
<TABLE>
<CAPTION>
RCI Holdings, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED MARCH 31
1997 1996
---------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,249,887) $ (875,655)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,563,825 1,285,901
Reduction in doubtful accounts (24,000) (37,000)
Deferred income taxes (120) 27,366
Write-down of investment in joint ventures 27,000 -
Amortization of deferred gain on
sale/leaseback (96,096) (96,096)
Changes in operating assets and liabilities 643,565 526,925
---------------------------------------------
Total adjustments 2,114,174 1,707,096
---------------------------------------------
Net cash provided by operating activities 864,287 831,441
INVESTING ACTIVITIES
Purchases of property, plant and equipment (410,999) (1,663,159)
---------------------------------------------
Net cash used in investing activities (410,999) (1,663,159)
FINANCING ACTIVITIES
Borrowing of long-term debt 239,500 1,672,691
Payment of long-term debt (779,340) (742,144)
---------------------------------------------
Net cash (used in) provided by financing activities (539,840) 930,547
Effect of exchange rate changes on cash (64,502) (88,169)
---------------------------------------------
Net (decrease) increase in cash (151,054) 10,660
Cash (overdrafts) in excess of cash balance:
Beginning of year (210,781) (221,441)
---------------------------------------------
End of year $ (361,835) $ (210,781)
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
11
<PAGE>
RCI Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 1997
1. DESCRIPTION OF BUSINESS
BACKGROUND
RCI Holdings, Inc. (Holdings) is a corporation formed in connection with a
corporate reorganization described below. Holdings' wholly owned subsidiary,
Roberts Consolidated Industries, Inc. (the Company), manufactures and markets
floor covering installation supplies and accessories. The Company's products,
consisting of carpet tools, tackless carpet gripper, adhesives, heat bond tape,
and metal moldings, are sold in more than 100 countries.
CORPORATE REORGANIZATION
At March 31, 1994, the Company was wholly owned by Roberts Holdings L.P.
Subsequent to this date, but prior to the corporate reorganization, the Argosy
Group L.P. (Argosy) and clients of Balfour Investors, Inc. purchased all of the
Company's previously outstanding senior subordinated notes of approximately
$38.2 million. Additionally, Argosy purchased from Roberts Holdings L.P. all of
the outstanding shares of common stock and a portion of the warrants of the
Company, and from Smith-Kline Beecham Corp. all of the outstanding shares of 6%
cumulative redeemable preferred stock which the Company subsequently repurchased
and retired.
During December 1994, the shareholders formed a new company (Holdings),
exchanging their shares in the Company for newly issued shares of Holdings.
Additionally, the Company borrowed approximately $10.8 million from various
financial institutions under a line of credit, term loan and senior subordinated
notes to refinance a portion of its previously outstanding subordinated debt.
Payment for the remaining balance of debt was forgiven. Through these series of
transactions, a new basis of accounting was established effective January 1,
1995, for financial reporting purposes. Holdings' cost of acquiring the Company
was allocated based on the fair market value of the underlying net assets
acquired. The purchase price was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of net assets acquired $ 18,178,000
Excess of cost over fair value of assets acquired 4,735,000
=======================
Total acquisition cost $ 22,913,000
=======================
</TABLE>
12
<PAGE>
1. DESCRIPTION OF BUSINESS (CONTINUED)
BACKGROUND (CONTINUED)
The excess of the acquisition cost over the fair value of net assets acquired is
being amortized over 15 years using the straight-line method. The accompanying
consolidated statements of operations, net capital deficiency, and cash flows
for the years ended March 31, 1997 and 1996, have been prepared on the new basis
of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Holdings' wholly
owned subsidiaries, Roberts Consolidated Industries, Inc., Roberts Holdings
International, Inc. and Roberts Canada. Investment in the 49% owned Brazilian
joint venture is accounted for using the equity method. All significant
intercompany transactions have been eliminated in consolidation.
Combined financial information of the foreign operations net of intercompany
activity is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------
<S> <C> <C>
Sales $ 7,516,616 $ 7,757,339
Operating profit 651,537 655,703
Total assets 3,535,999 3,427,567
</TABLE>
REVENUE AND COST RECOGNITION
Revenues and costs are recognized upon shipment of merchandise.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
first-in, first-out (FIFO) cost, or market.
13
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------
<S> <C> <C>
Raw materials $ 2,341,330 $ 2,983,678
Work-in-process 898,601 1,083,026
Finished goods 2,401,896 2,208,386
=============================================
$ 5,641,827 $ 6,275,090
=============================================
</TABLE>
PLANT AND EQUIPMENT
Plant and equipment is stated at cost and is depreciated using primarily the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Buildings and building improvements - 20 - 50 years
Machinery and equipment - 3 - 15 years
Furniture and fixtures - 8 - 10 years
Leasehold improvements - Lease life or 15 years, whichever is less
</TABLE>
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net assets
acquired resulting from the reorganization described in Note 1. Other intangible
assets consist of acquisition and debt issuance costs and are being amortized
over the life of the debt.
TRANSLATION OF FOREIGN CURRENCIES
The Company translates foreign currency financial statements by translating
balance sheet accounts at year-end exchange rates and income statement accounts
at the average exchange rates for the year. Translation gains and losses are
recorded in net capital deficiency and transaction gains and losses are
reflected in the consolidated statements of operations.
INCOME TAXES
Deferred income taxes are recorded based upon differences between the financial
statement and tax basis of assets and liabilities.
14
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES AND CONCENTRATION OF CREDIT RISK
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
The Company is potentially subject to a concentration of credit risk for trade
receivables from flooring material and accessory distributors. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential losses for
uncollectible accounts and such losses have been within management's
expectations.
3. STATEMENT OF CASH FLOWS
Changes in operating assets and liabilities are as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------
<S> <C> <C>
Accounts receivable $ (378,195) $ 1,049,080
Inventories 633,263 625,245
Prepaid expenses (35,093) 10,588
Other assets (8,545) (222,018)
Accounts payable (47,337) (544,812)
Accrued liabilities 145,892 (391,158)
Accrued interest 333,580 -
---------------------------------------------
$ 643,565 $ 526,925
=============================================
</TABLE>
The Company purchased approximately $68,000 of equipment with capital leases
during 1996.
15
<PAGE>
4. INCOME TAXES
Significant components of the provision for taxes based on income are as follows
at March 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C>
Foreign:
Current $ 81,652 $ 65,377 $ 127,634
Deferred (120) 27,366 (52,982)
Federal:
Current (800) (800) (6,294)
Deferred - - -
State:
Current 800 800 406
Deferred - - -
-------------------------------------------------------------------
$ 81,532 $ 92,743 $ 68,764
===================================================================
</TABLE>
A reconciliation of the differences between income tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income taxes at March 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------
<S> <C> <C>
Federal tax at statutory rate: ( 34)% (34)%
Non deductible expenses 8 1
Net operating loss not currently benefited 26 33
Additional foreign taxes 7 8
Other - 3
-------------------------------------
7% 11%
=====================================
</TABLE>
Pretax income (loss) for domestic and foreign operations for the years ended
March 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------
<S> <C> <C>
Domestic $ (1,160,267) $ (830,281)
Foreign (8,088) 47,369
--------------------------------------------------
$ (1,168,355) $ (782,912)
==================================================
</TABLE>
16
<PAGE>
4. INCOME TAXES (CONTINUED)
At March 31, 1997, the Company had total deferred tax assets of approximately
$1,900,840 ($1,709,000 for federal, $188,000 for state and $3,840 for foreign)
and deferred tax liabilities of $274,086 ($225,000 for federal, $18,000 for
state and $31,086 for foreign). At March 31, 1996, the Company had total
deferred tax assets of approximately $1,832,000 ($1,615,000 for federal,
$181,000 for state and $36,000 for foreign) and deferred tax liabilities of
$391,000 ($308,000 for federal, $20,000 for state and $63,000 for foreign). The
Company has a total valuation allowance of $1,654,000 ($1,484,000 for federal
and $170,000 for state). There was an approximate $186,000 change in the
valuation account during the current year which, when netted against deferred
tax assets, has no financial statement impact.
Significant components of the Company's deferred tax liabilities and assets as
of the year end are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Deferred gross profit $ 153,600 $ 192,185
Vacation accrual 91,715 92,072
Amortization 166,325 48,642
Bonus accrual 204,240 -
Net operating loss carryover 991,660 1,252,330
Foreign tax credit carryover 127,500 104,470
State depreciation 21,780 18,236
Bad debt reserve 60,825 47,930
Other 83,195 76,135
--------------------------------------------------------
1,900,840 1,832,000
Deferred income tax liabilities:
Federal and foreign
depreciation 225,270 308,530
Other 48,816 82,836
--------------------------------------------------------
274,086 391,366
Net deferred asset 1,626,754 1,440,634
Valuation allowance (1,654,000) (1,468,000)
--------------------------------------------------------
Net deferred tax liability $ (27,246) $ (27,366)
========================================================
</TABLE>
17
<PAGE>
4. INCOME TAXES (CONTINUED)
At March 31, 1997, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $2,873,000 and $156,000,
respectively, expiring through 2012.
The Company also has foreign tax credit carryforwards for federal income tax
purposes of approximately $106,000 expiring through 2000.
Income taxes paid during the years ended March 31, 1997 and 1996, were $109,000
and $113,000, respectively.
5. DEBT
The Company has a revolving credit agreement with IBJ Schroder Bank & Trust Co.
and may borrow up to $8,000,000 based upon 85% of eligible domestic accounts
receivable and 50% of eligible inventory. At March 31, 1997, the Company has
approximately $1,064,000 available on the revolving credit. The revolving credit
bears interest at prime (8.5% at March 31, 1997), plus 1.5% or Euro dollar
(approximately 6.0% at March 31, 1997), plus 3.5% and is collateralized by
substantially all of the assets of the Company. The weighted average interest
rate relating to the revolving credit agreement was 9.5% and 9.9% for the years
ended March 31, 1997 and 1996, respectively. The revolving credit expires on
December 31, 1999, and requires the Company to maintain certain current and
fixed charge ratios, meet minimum consolidated earnings and limit preferred
stock dividends. As of March 31, 1997, the Company was not in compliance with
certain covenants.
The 12.5% senior subordinated notes require the Company to maintain certain
current and fixed charge ratios, meet minimum consolidated earnings and limit
capital and other expenditures. As of March 31, 1997, the Company was not in
compliance with certain covenants.
18
<PAGE>
5. DEBT (CONTINUED)
Long-term debt consists of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------
<S> <C> <C>
Revolving credit agreement $ 6,935,840 $ 6,697,653
12.5% senior subordinated notes, due December 31, 2001
5,992,151 5,990,839
Termloan, principal due in monthly installments
ranging from $60,000 - $78,000, interest payable
quarterly at prime (8.5% at March 31, 1997) plus
1.5% or at Euro dollar (approximately 6.0% at
March 31, 1997) plus 3.5%, is due December 31,
1999 and is subject to the same provisions as the
revolving credit agreement 2,470,000 3,220,000
Capitalized leases including interest at effective interest
rates from 5% to 19% collateralized by machinery
and equipment with a net book value of $73,570 and
$91,960, respectively 36,160 65,499
---------------------------------------------
15,434,151 15,973,991
Less amount due within one year 887,850 782,856
---------------------------------------------
$ 14,546,301 $ 15,191,135
=============================================
</TABLE>
Principal maturities of long-term debt due subsequent to March 31, 1997, are as
follows:
YEAR ENDING MARCH 31,
1998 $ 887,850
1999 913,308
2000 7,640,842
2001 5,992,151
=======================
$ 15,434,151
=======================
Interest paid during the years ended March 31, 1997 and 1996, was approximately
$1,347,000 and $1,696,000, respectively.
19
<PAGE>
5. DEBT (CONTINUED)
In connection with the sale of the Company (see Note 11), the senior and
subordinated debt were satisfied at closing.
6. COMMITMENTS
LEASES
The Company leases certain plant, warehouse and office facilities under
long-term lease agreements expiring on various dates through 2003.
Lease expense for all noncancelable operating leases was approximately $924,000
and $898,000 for the years ended March 31, 1997 and 1996, respectively.
Minimum rentals from noncancelable operating leases are as follows:
YEAR ENDING MARCH 31,
1998 $ 951,577
1999 955,368
2000 975,301
2001 964,906
2002 991,089
Thereafter 995,117
-----------------------
Total future minimum lease payments $ 5,833,358
=======================
7. NET CAPITAL DEFICIENCY
COMMON STOCK
Holdings has reserved 3,747 shares of common stock for issuance upon exercise of
the Common Stock Warrants.
20
<PAGE>
7. NET CAPITAL DEFICIENCY (CONTINUED)
PREFERRED STOCK
Holdings has authorized 30,000 shares and issued 20,000 shares of Cumulative
Preferred Stock (Preferred Stock). The holders of the Preferred Stock have no
voting rights. The holders are entitled to receive dividends at the annual rate
of 8%, when declared by the Board of Directors out of funds legally available
for dividends. The dividends are payable semiannually in arrears on June 30 and
December 31 commencing June 1995 (Dividend Payment Date). Dividends are
cumulative and accrue whether or not earned or declared.
Dividends accruing in respect to the first ten semiannual dividend payment dates
may be paid by issuing additional shares of preferred stock at the rate of 1/100
of a share for each $1 of such dividend. Holdings, at its option, may pay a cash
dividend in lieu of issuing fractional shares. Dividends accruing during the
eleventh period and thereafter must be paid in cash.
The Preferred Stock must be redeemed by Holdings in three equal installments of
50% of the outstanding shares on January 1, 2002, 2003 and 2004, at $100 per
share, plus accrued and unpaid dividends.
Upon dissolution or liquidation of Holdings, the holders of Preferred Stock are
entitled to $100 per preferred share plus the cumulative dividends accrued after
payment of liabilities.
At March 31, 1997, no dividends have been declared by the Board of Directors,
and cumulative preferred dividends in arrears amount to approximately $360,000.
STOCK WARRANTS
As part of the corporate reorganization, Holdings issued Warrants at a value of
$10,900 to the holders of the term loan, line of credit and senior subordinated
notes (see Note 5). The Warrants entitle the holders to purchase a total of
3,747 shares of Holdings' Common Stock at $.01 per share on or before December
31, 2004. As of March 31, 1997, no warrants have been exercised.
21
<PAGE>
8. RELATED PARTY TRANSACTIONS
The Argosy Group L.P. and Balfour Investors, Inc. rendered various management
services to the Company in 1997. Included in general and administrative expense
for the year ended March 31, 1997, is $250,000 for these services.
9. RETIREMENT PLANS
The Company has established two noncontributory defined benefit plans (the
Plans) to provide retirement benefits for substantially all of its U.S.
employees. One plan, which was bargained with the union, covers union employees.
This plan continues. The other plan, which covers certain nonunion employees of
the Company, was frozen as of February 28, 1994. All benefits were fixed as of
that date. In lieu of continuing the plan, the Company increased its matching
contribution in a 401(k) plan to 50% on up to 5% of eligible earnings for all
participating employees.
Benefits under the Plans are based on employees' earnings and length of service
with the Company. Non-U.S. employees are generally enrolled in pension plans in
their country of domicile.
Net periodic pension income for the years ended December 31, 1996 and 1995,
included the following components for its U.S. pension plans:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------
<S> <C> <C>
Service cost $ 4,803 $ 4,101
Interest cost on projected benefit obligation 167,583 164,302
Actual return on plan assets (401,895) (467,526)
Net amortization and deferral 195,017 289,753
---------------------------------------------
Net periodic pension income $ (34,492) $ (9,370)
=============================================
</TABLE>
The following table sets forth the Plans' funded status at December 31 for its
U.S. pension plans:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated
benefit obligations:
Vested $ 2,159,227 $ 2,069,918
Nonvested 47,587 81,054
---------------------------------------------
Accumulated benefit obligation $ 2,206,814 $ 2,150,972
=============================================
</TABLE>
22
<PAGE>
9. RETIREMENT PLANS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------
<S> <C> <C>
Projected benefit obligation $ (2,206,814) $ (2,150,972)
Plan assets at fair market value 2,925,088 2,630,717
---------------------------------------------
Plan assets in excess of projected benefit obligation
718,274 479,745
Unrecognized net gain (439,264) (247,065)
Unrecognized net asset (929) (1,003)
---------------------------------------------
Prepaid pension cost $ 278,081 $ 231,677
=============================================
</TABLE>
Assumptions used in the accounting as of December 31 were:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------
<S> <C> <C>
Discount rate used to measure projected
benefit obligation 8% 8%
Rate of compensation increase used to measure
projected benefit obligation N/A N/A
Expected long-term rate of return on plan assets
8% 8%
</TABLE>
Plan assets are held in a master trust which is administered by Wertheim
Schroder & Co. Plan assets include corporate equity securities, corporate and
government bonds, and money market accounts.
Total U.S. pension income for the years ended March 31, 1997 and 1996, was
approximately $37,000 and $9,000, respectively.
10. CONTINGENCIES
Various legal actions and claims are pending against the Company in the ordinary
course of business. In the opinion of management and its legal counsel, the
outcome of these matters will not have a material adverse effect on the
Company's financial position.
11. SALE OF COMPANY
On October 21, 1997, the shareholders of RCI Holdings, Inc. sold all of the
common stock of Roberts Consolidated Industries, Inc. to QEP Co., Inc. for
$12,350,000 in cash, $7,500,000 in 8% subordinated debentures due April 2001 and
five-year warrants to purchase 200,000 shares of QEP common stock. The existing
senior and subordinated debt and other nontrade debt of Holdings including any
accrued interest, and preferred stock, were satisfied at closing. The
transaction is intended to be recorded using the purchase method of accounting
for business combinations.
23
<PAGE>
Consolidated Financial Statements
RCI Holdings, Inc.
Roberts Consolidated Industries, Inc.
YEAR ENDED MARCH 31, 1996,
THREE MONTHS ENDED MARCH 31, 1995 AND
NINE MONTHS ENDED DECEMBER 31, 1994
WITH REPORT OF INDEPENDENT AUDITORS
24
<PAGE>
RCI Holdings, Inc.
Roberts Consolidated Industries, Inc.
Consolidated Financial Statements
Year ended March 31, 1996,
three months ended March 31, 1995 and
nine months ended December 31, 1994
CONTENTS
Report of Independent Auditors...................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets......................................2
Consolidated Statements of Operations............................4
Consolidated Statements of Net Capital Deficiency................5
Consolidated Statements of Cash Flows............................7
Notes to Consolidated Financial Statements.......................8
25
<PAGE>
Report of Independent Auditors
The Board of Directors
RCI Holdings, Inc.
We have audited the accompanying consolidated balance sheets of RCI Holdings,
Inc. (previously reported under Roberts Consolidated Industries, Inc.) and
subsidiaries as of March 31, 1996 and 1995, and the related consolidated
statements of operations, net capital deficiency, and cash flows for the year
ended March 31, 1996, the three months ended March 31, 1995, and the nine months
ended December 31, 1994. These financial statements are the responsibility of
RCI Holdings Inc.'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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RCI
Holdings, Inc. and subsidiaries at March 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for the year ended March 31,
1996, the three months ended March 31, 1995, and the nine months ended December
31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 1, during December 1994 the shareholders of Roberts
Consolidated Industries, Inc. formed a new company, exchanging their shares in
Roberts Consolidated Industries, Inc. for newly issued shares of RCI Holdings,
Inc. Additionally, Roberts Consolidated Industries, Inc. refinanced a portion of
its senior subordinated debt with the remaining balance being forgiven. Through
these transactions, a new basis of accounting was established for financial
reporting purposes.
/s/ Ernst & Young LLP
Riverside, California
May 16, 1996, except for Notes 5 and 11 as
to which the date is October 21, 1997
26
<PAGE>
<TABLE>
<CAPTION>
RCI Holdings, Inc.
Roberts Consolidated Industries, Inc.
Consolidated Balance Sheets
MARCH 31
1996 1995
---------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 52,999 $ 112,329
Accounts receivable, less allowance for doubtful
accounts of $193,000 and $230,000 in 1996 and
1995, respectively 5,549,690 6,561,770
Inventories 6,275,090 6,900,335
Prepaid expenses 151,792 162,380
---------------------------------------------
Total current assets 12,029,571 13,736,814
Buildings and building improvements 33,024 33,024
Machinery and equipment 4,373,861 2,665,214
Furniture and fixtures 724,932 640,684
Leasehold improvements 202,291 188,606
---------------------------------------------
5,334,108 3,527,528
Less accumulated depreciation and amortization 1,160,912 243,854
---------------------------------------------
4,173,196 3,283,674
Goodwill (net of accumulated amortization of $437,881
and $199,048 in 1996 and 1995, respectively) 4,381,226 4,620,059
Debt issuance costs (net of accumulated amortization
of $276,824 and $71,871 in 1996 and 1995, respectively) 952,972 1,157,925
Investments in joint ventures 76,724 76,724
Other assets 360,810 138,792
=============================================
Total assets $ 21,974,499 $ 23,013,988
=============================================
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
MARCH 31
1996 1995
---------------------------------------------
<S> <C> <C>
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Cash overdraft $ 263,780 $ 333,770
Accounts payable 3,435,507 3,980,319
Accrued liabilities 918,988 1,310,146
Long-term debt due within one year 782,856 739,165
---------------------------------------------
Total current liabilities 5,401,131 6,363,400
Long-term debt 15,191,135 14,235,801
Deferred tax liability 27,366 -
Deferred profit on sale/leaseback 480,459 576,555
Commitments and contingencies
Redeemable preferred stock, 30,000 shares authorized, 20,000 shares
issued and outstanding (liquidation preference of $2,200,000 at
March 31, 1996) 2,000,000 2,000,000
Net capital deficiency:
Common stock, $.0001 par value:
Authorized shares - 50,000
Issued and outstanding shares - 20,428 2 2
Common stock warrants 10,900 10,900
Additional paid-in capital 25,032 25,032
Foreign currency translation adjustments 11,601 104,020
Accumulated deficit (1,173,127) (301,722)
---------------------------------------------
Total net capital deficiency (1,125,592) (161,768)
---------------------------------------------
Total liabilities and net capital deficiency $ 21,974,499 $ 23,013,988
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
28
<PAGE>
<TABLE>
<CAPTION>
RCI Holdings, Inc.
Roberts Consolidated Industries, Inc.
Consolidated Statements of Operations
ROBERTS
RCI CONSOLIDATED
HOLDINGS, INC. INDUSTRIES, INC.
------------------------------------------------------------------
YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31 MARCH 31 DECEMBER 31
1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 48,546,772 $ 13,189,097 $ 36,494,961
Cost of sales 41,013,483 11,069,002 30,504,094
-------------------------------------------------------------------
Gross profit 7,533,289 2,120,095 5,990,867
Costs and expenses:
Selling, general and administrative 6,619,839 1,831,773 4,918,224
Interest 1,696,362 489,808 3,966,372
-------------------------------------------------------------------
8,316,201 2,321,581 8,884,596
Loss before provision for taxes
based on income (782,912) (201,486) (2,893,729)
Provision for taxes based
on income 92,743 68,764 -
===================================================================
Net loss $ (875,655) $ (270,250) $ (2,893,729)
===================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
<TABLE>
<CAPTION>
RCI Holdings, Inc.
Roberts Consolidated Industries, Inc.
Consolidated Statements of Net Capital Deficiency
6% CUMULATIVE REDEEMABLE
PREFERRED STOCK CLASS A COMMON STOCK
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ROBERTS CONSOLIDATED
INDUSTRIES, INC.
- ------------------------------------------
Balances at March 31, 1994 50,000 $ 5,000,000 5,000 $ 50
Purchase and retirement of preferred
stock at $100 50,000) (5,000,000) - -
Debt restructuring - - - -
Foreign currency translation
adjustments - - - -
Net loss for the nine months ended -
December 31, 1994 - - -
------------------------------------------------------------------------------------------
Balances at December 31, 1994 - $ - 5,000 $ 50
==========================================================================================
RCI HOLDINGS, INC.
- -------------------------------------------
Initial capitalization - $ - - $ -
Foreign currency translation
adjustments - - - -
Net loss for the three months ended
March 31, 1995 - - - -
Other - - - -
------------------------------------------------------------------------------------------
Balances at March 31, 1995 - - - -
Net loss for the year ended
March 31, 1996 - - - -
Foreign currency translation
adjustments - - - -
Other - - - -
------------------------------------------------------------------------------------------
Balances at March 31, 1996 - $ - - $ -
==========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
30
<PAGE>
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK COMMON ADDITIONAL CURRENCY
- -------------------------- STOCK PAID-IN TRANSLATION ACCUMULATED NET CAPITAL
SHARES AMOUNT WARRANTS CAPITAL ADJUSTMENTS DEFICIT DEFICIENCY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- $ - $ - $ 2,174,950 $ 398,067 $ (34,634,568) $ (27,061,501)
- - - 4,900,000 - - (100,000)
- - - 27,400,498 - - 27,400,498
- - - - (24,365) - (24,365)
- - - - - (2,893,729) (2,893,729)
- --------------------------------------------------------------------------------------------------------------------------------
- $ - $ - $ 34,475,448 $ 373,702 $ (37,528,297) $ (2,679,097)
================================================================================================================================
20,248 $ 2 $ 10,900 $ 25,032 $ - $ - $ 35,934
- - - - 104,020 - 104,020
- - - - - (270,250) (270,250)
- - - - - (31,472) (31,472)
- --------------------------------------------------------------------------------------------------------------------------------
20,248 2 10,900 25,032 104,020 (301,722) (161,768)
- - - - - (875,655) (875,655)
- - - - (92,419) - (92,419)
- - - - - 4,250 4,250
- --------------------------------------------------------------------------------------------------------------------------------
20,248 $ 2 $ 10,900 $ 25,032 $ 11,601 $ (1,173,127) $ (1,125,592)
================================================================================================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
RCI Holdings, Inc.
Roberts Consolidated Industries, Inc.
Consolidated Statements of Cash Flows
ROBERTS
RCI CONSOLIDATED
HOLDINGS, INC. INDUSTRIES, INC.
------------------------------------------------------------------
YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31 MARCH 31 DECEMBER 31
1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (875,655) $ (270,250) $ (2,893,729)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,285,901 401,988 740,459
(Reduction in) provision for doubtful
accounts (37,000) 24,914 (495)
Deferred income taxes 27,366 (52,982) -
Undistributed earnings from equity in
joint venture (income) loss - (30,187) 439
Amortization of deferred gain on
sale/leaseback (96,096) (24,024) (72,072)
Changes in operating assets and liabilities 526,925 (744,756) 82,720
-------------------------------------------------------------------
Total adjustments 1,707,096 (425,047) 751,051
-------------------------------------------------------------------
Net cash provided by (used in) operating
activities 831,441 (695,297) (2,142,678)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,663,159) (196,936) (114,031)
Payments of debt issuance costs - (211,893) (999,897)
Foreign currency translation adjustments - 28,453 57,750
-------------------------------------------------------------------
Net cash used in investing activities (1,663,159) (380,376) (1,056,178)
FINANCING ACTIVITIES
Net proceeds (payments) on line of credit 1,672,691 - (3,424,252)
Payment of long-term debt (742,144) (20,564) (79,829)
Proceeds from common stock warrants - 34 9,500
Purchase of preferred stock - - (100,000)
Net proceeds from financing - 766,562 -
Proceeds from refinancing - - 14,189,109
Payment on subordinated notes - - (10,770,000)
Interest on subordinated debt subsequently
forgiven - - 3,478,604
-------------------------------------------------------------------
Net cash provided by financing activities 930,547 746,032 3,303,132
Effect of exchange rate changes on cash (88,169) 5,284 2,856
-------------------------------------------------------------------
Net increase (decrease) in cash 10,660 (324,357) 107,132
Cash (overdrafts) in excess of cash balance:
Beginning of year (221,441) 102,916 (4,216)
-------------------------------------------------------------------
End of year $ (210,781) $ (221,441) $ 102,916
===================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
32
<PAGE>
RCI Holdings, Inc.
Roberts Consolidated Industries, Inc.
Notes to Consolidated Financial Statements
March 31, 1996
1. DESCRIPTION OF BUSINESS
BACKGROUND
RCI Holdings, Inc. (Holdings) is a corporation formed in connection with a
corporate reorganization described below. Holdings' wholly owned subsidiary,
Roberts Consolidated Industries, Inc. (the Company), manufactures and markets
floor covering installation supplies and accessories. The Company's products,
consisting of carpet tools, tackless carpet gripper, adhesives, heat bond tape,
and metal moldings, are sold in more than 100 countries.
CORPORATE REORGANIZATION
At March 31, 1994, the Company was wholly owned by Roberts Holdings L.P.
Subsequent to this date, but prior to the corporate reorganization, the Argosy
Group L.P. (Argosy) and clients of Balfour Investors, Inc. purchased all of the
Company's previously outstanding senior subordinated notes of approximately
$38.2 million. Additionally, Argosy purchased from Roberts Holdings L.P. all of
the outstanding shares of common stock and a portion of the warrants of the
Company, and from Smith-Kline Beecham Corp. all of the outstanding shares of 6%
cumulative redeemable preferred stock which the Company subsequently repurchased
and retired.
During December 1994, the shareholders formed a new company (Holdings),
exchanging their shares in the Company for newly issued shares of Holdings.
Additionally, the Company borrowed approximately $10.8 million from various
financial institutions under a line of credit, term loan and senior subordinated
notes to refinance a portion of its previously outstanding subordinated debt.
Payment for the remaining balance of debt was forgiven. Through these series of
transactions, a new basis of accounting was established effective January 1,
1995, for financial reporting purposes. Holdings' cost of acquiring the Company
was allocated based on the fair market value of the underlying net assets
acquired. The purchase price was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of net assets acquired $ 18,178,000
Excess of cost over fair value of assets acquired 4,735,000
=======================
Total acquisition cost $ 22,913,000
=======================
</TABLE>
33
<PAGE>
1. DESCRIPTION OF BUSINESS (CONTINUED)
The excess of the acquisition cost over the fair value of net assets acquired is
being amortized over 15 years using the straight-line method. The accompanying
consolidated statements of operations, shareholders' equity (net capital
deficiency), and cash flows for the year ended March 31, 1996, and three months
ended March 31, 1995, have been prepared on the new basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Holdings' wholly
owned subsidiaries, Roberts Consolidated Industries, Inc., Roberts Holdings
International, Inc. and Roberts Canada. Investment in the 49% owned Brazilian
joint venture is accounted for using the equity method. All significant
intercompany transactions have been eliminated in consolidation.
Combined financial information of the foreign operations net of intercompany
activity is as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------
<S> <C> <C>
Sales $ 7,757,339 $ 7,909,897
Operating profit 655,703 825,017
Total assets 3,427,567 3,993,769
</TABLE>
REVENUE AND COST RECOGNITION
Revenues and costs are recognized upon shipment of merchandise.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
first-in, first-out (FIFO) cost, or market.
34
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories consist of the following at March 31:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------
<S> <C> <C>
Raw materials $ 2,983,678 $ 2,623,197
Work-in-process 1,083,026 1,258,729
Finished goods 2,208,386 3,018,409
=============================================
$ 6,275,090 $ 6,900,335
=============================================
</TABLE>
PLANT AND EQUIPMENT
Plant and equipment is stated at cost and is depreciated using primarily the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Buildings and building improvements - 20 - 50 years
Machinery and equipment - 3 - 15 years
Furniture and fixtures - 8 - 10 years
Leasehold improvements - Lease life or 15 years, whichever is less
</TABLE>
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net assets
acquired resulting from the reorganization described in Note 1. Other intangible
assets consist of acquisition and debt issuance costs and are being amortized
over the life of the debt.
TRANSLATION OF FOREIGN CURRENCIES
The Company translates foreign currency financial statements by translating
balance sheet accounts at year-end exchange rates and income statement accounts
at the average exchange rates for the year. Translation gains and losses are
recorded in shareholders' equity and transaction gains and losses are reflected
in the consolidated statements of operations.
35
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are recorded based upon differences between the financial
statement and tax basis of assets and liabilities.
USE OF ESTIMATES AND CONCENTRATION OF CREDIT RISK
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
The Company is potentially subject to a concentration of credit risk for trade
receivables from flooring material and accessory distributors. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential losses for
uncollectible accounts and such losses have been within management's
expectations.
RECLASSIFICATION
Certain amounts for 1995 have been reclassified to conform with the 1996
presentation.
3. STATEMENT OF CASH FLOWS
Changes in operating assets and liabilities are as follows:
<TABLE>
<CAPTION>
ROBERTS
RCI CONSOLIDATED
HOLDINGS, INC. INDUSTRIES, INC.
------------------------------------------------------------------
YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31 MARCH 31 DECEMBER 31
1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable $ 1,049,080 $ (471,317) $ 1,213,798
Inventories 625,245 63,904 (937,684)
Prepaid expenses 10,588 34,785 (39,935)
Intangibles - (5,059) -
Other assets (222,018) (6,294) (3,463)
Accounts payable (544,812) (542,426) 768,481
Accrued liabilities (391,158) 181,651 (918,477)
===================================================================
$ 526,925 $ (744,756) $ 82,720
===================================================================
</TABLE>
36
<PAGE>
3. STATEMENT OF CASH FLOWS (CONTINUED)
As part of the corporate reorganization (see Note 1), approximately $27.4
million of debt at December 22, 1994, was exchanged for preferred stock of
$2,000,000 and the difference credited to shareholders' equity.
The Company purchased approximately $68,000 of equipment with capital leases
during 1996.
4. INCOME TAXES
Significant components of the provision for taxes based on income are as follows
at March 31;
1996 1995
--------------------------------
Foreign:
Current $ 65,377 $ 127,634
Deferred 27,366 (52,982)
Federal:
Current (800) (6,294)
Deferred - -
State:
Current 800 406
Deferred - -
------------------------------------
$ 92,743 $ 68,764
====================================
37
<PAGE>
4. INCOME TAXES (CONTINUED)
A reconciliation of the difference between income tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income taxes at March 31 is as follows:
1996 1995
----------------------------
Federal tax at statutory rate ( 34)% (34)%
Non deductible expenses 1 -
Net operating loss not currently
benefited 33 34
Additional foreign taxes 8 4
Other 3 (2)
----------------------------
11% 2%
============================
Pretax income (loss) for domestic and foreign operations for the years ended
March 31 is as follows:
1996 1995
----------------------------------------
Domestic $ (830,281) $ (3,679,876)
Foreign 47,369 584,661
----------------------------------------
$ (782,912) $ (3,095,215)
========================================
At March 31, 1996, the Company had total deferred tax assets of approximately
$1,832,000 ($1,615,000 for federal, $181,000 for state and $36,000 for foreign)
and deferred tax liabilities of $391,000 ($308,000 for federal, $20,000 for
state and $63,000 for foreign) and deferred tax liabilities of $391,000
($308,000 for federal, $20,000 for state and $63,000 for foreign) At March 31,
1995, the Company had total deferred tax assets of approximately $2,780,000
($2,240,000 for federal, $296,000 for state and $244,000 for foreign) and
deferred liabilities of $587,000 ($439,000 for federal, $35,000 for state and
$113,000 for foreign). The Company has a total valuation allowance of $1,468,000
($1,307,000 for federal and $161,000 for state). There was an approximate
$725,000 change in the valuation account during the current year which, when
netted against deferred tax assets, has no financial statement impact.
38
<PAGE>
4. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets as
of the year end are as follows:
1996 1995
-------------------------------
Deferred income tax assets:
Deferred gross profit $ 192,185 $ 230,620
Vacation accrual 92,072 84,395
Amortization 48,642 102,695
Net operating loss carryover 1,252,330 1,982,800
Foreign tax credit carryover 104,470 104,470
State depreciation 18,236 16,310
Bad debt reserve 47,930 63,530
Other 76,135 195,180
-------------------------------
1,832,000 2,780,000
Deferred income tax liabilities:
Federal and foreign depreciation 308,530 520,000
Other 82,836 67,000
--------------------------------
391,366 587,000
Net deferred asset 1,440,634 2,193,000
Valuation allowance (1,468,000) (2,193,000)
--------------------------------
Net deferred tax liability $ (27,366) $ -
================================
At March 31, 1996, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $3,275,000 and $457,000
respectively, expiring through 2011.
The Company also has foreign tax credit carryforwards for federal income tax
purposes of approximately $106,000 expiring through 2000.
Income taxes paid during the years ended March 31, 1996 and 1995, were $113,000
and $15,000, respectively.
39
<PAGE>
5. DEBT
The Company has a revolving credit agreement with IBJ Schroder Bank & Trust Co.
and may borrow up to $8,000,000 based upon 85% of eligible domestic accounts
receivable and 50% of eligible inventory. At March 31, 1996, the Company has
approximately $1,302,000 available on the revolving credit. The revolving credit
bears interest at prime (8.25% at March 31, 1996), plus 1.5% or Euro dollar
(approximately 5.5% at March 31, 1996), plus 3.5% and is collateralized by
substantially all of the assets of the Company. The weighted average interest
rate relating to the revolving credit agreement was 9.9% and 10.8% for the years
ended March 31, 1996 and 1995, respectively. The revolving credit expires on
December 31, 1999, and requires the Company to maintain certain current and
fixed charge ratios, meet minimum consolidated earnings and limit preferred
stock dividends. As of March 31, 1996, the Company was not in compliance with
certain covenants.
The 12.5% senior subordinated notes require the Company to maintain certain
current and fixed charge ratios, meet minimum consolidated earnings and limit
capital and other expenditures. As of March 31, 1996, the Company was not in
compliance with certain covenants.
Long-term debt consists of the following at March 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------
<S> <C> <C>
Revolving credit agreement $ 6,697,653 $ 5,024,962
12.5% senior subordinated notes, due December 31, 2001 5,990,839 5,990,839
Termloan, principal due in monthly installments ranging from $60,000 - $78,000,
interest payable quarterly at prime (8.25% at March 31, 1996) plus 1.5% or
at Euro dollar (approximately 5.5% at March 31, 1996) plus 3.5%, is due
December 31, 1999 and is subject to the same provisions as the revolving
credit agreement 3,220,000 3,940,000
Capitalized leases including interest at effective interest rates from 5% to 19%
collateralized by machinery and equipment with a net book value of $91,960
and $52,270, respectively
65,499 19,165
------------------------------------
15,973,991 14,974,966
Less amount due within one year 782,856 739,165
------------------------------------
$ 15,191,135 $ 14,235,801
====================================
</TABLE>
40
<PAGE>
5. DEBT (CONTINUED)
Principal maturities of long-term debt due subsequent to March 31, 1996, are as
follows:
YEAR ENDING MARCH 31,
----------------------
1997 $ 782,856
1998 887,856
1999 909,830
2000 7,402,610
2001 -
Thereafter 5,990,839
---------------
$ 15,973,991
===============
Interest paid during the years ended March 31, 1996 and 1995, was approximately
$1,696,000 and $1,107,000, respectively.
In connection with the sale of the Company (see Note 11), the senior and
subordinated debt were satisfied at closing.
6. COMMITMENTS
LEASES
The Company leases certain plant, warehouse and office facilities under
long-term lease agreements expiring on various dates through 2003.
Lease expense for all noncancelable operating leases was approximately $898,000
and $886,000 for the years ended March 31, 1996 and 1995, respectively.
Minimum rentals from noncancelable operating leases are as follows:
YEAR ENDING MARCH 31,
---------------------
1997 $ 923,406
1998 950,100
1999 955,368
2000 975,301
2001 964,906
Thereafter 991,089
--------------
Total future minimum lease payments $ 5,760,170
==============
41
<PAGE>
7. NET CAPITAL DEFICIENCY
COMMON STOCK
Holdings has reserved 3,747 shares of common stock for issuance upon exercise of
the Common Stock Warrants.
PREFERRED STOCK
Holdings has authorized 30,000 shares and issued 20,000 shares of Cumulative
Preferred Stock (Preferred Stock). The holders of the Preferred Stock have no
voting rights. The holders are entitled to receive dividends at the annual rate
of 8%, when declared by the Board of Directors out of funds legally available
for dividends. The dividends are payable semiannually in arrears on June 30 and
December 31 commencing June 1995 (Dividend Payment Date). Dividends are
cumulative and accrue whether or not earned or declared.
Dividends accruing in respect to the first ten semiannual dividend payment dates
may be paid by issuing additional shares of preferred stock at the rate of 1/100
of a share for each $1 of such dividend. Holdings, at its option, may pay a cash
dividend in lieu of issuing fractional shares. Dividends accruing during the
eleventh period and thereafter must be paid in cash.
The Preferred Stock must be redeemed by Holdings in three equal installments of
50% of the outstanding shares on January 1, 2002, 2003 and 2004, at $100 per
share, plus accrued and unpaid dividends.
Upon dissolution or liquidation of Holdings, the holders of Preferred Stock are
entitled to $100 per preferred share plus the cumulative dividends accrued after
payment of liabilities.
At March 31, no dividends have been declared by the Board of Directors, and
cumulative preferred dividends in arrears amount to approximately $200,000.
STOCK WARRANTS
As part of the corporate reorganization, Holdings issued Warrants at a value of
$10,900 to the holders of the term loan, line of credit and senior subordinated
notes (see Note 5). The Warrants entitle the holders to purchase a total of
3,747 shares of Holdings' Common Stock at $.01 per share on or before December
31, 2004. As of March 31, 1996, no warrants have been exercised.
42
<PAGE>
8. RELATED PARTY TRANSACTIONS
The Argosy Group L.P. and Balfour Investors, Inc. rendered various management
services to the Company in 1996. Included in general and administrative expense
for the year ended March 31, 1996, is $250,000 for these services.
9. RETIREMENT PLANS
The Company has established two noncontributory defined benefit plans (the
Plans) to provide retirement benefits for substantially all of its U.S.
employees. One plan, which was bargained with the union, covers union employees.
This plan continues. The other plan, which covers certain nonunion employees of
the Company, was frozen as of February 28, 1994. All benefits were fixed as of
that date. In lieu of continuing the plan, the Company increased its matching
contribution in a 401(k) plan to 50% on up to 5% of eligible earnings for all
participating employees.
Benefits under the Plans are based on employees' earnings and length of service
with the Company. Non-U.S. employees are generally enrolled in pension plans in
their country of domicile.
Net periodic pension (income) cost for the years ended December 31, 1995 and
1994, included the following components for its U.S. pension plans:
<TABLE>
<CAPTION>
1995 1994
-------------------------------
<S> <C> <C>
Service cost $ 4,101 $ 160,121
Interest cost on projected benefit obligation 164,302 200,953
Actual return on plan assets (467,526) (83,909)
Net amortization and deferral 289,753 (87,895)
-------------------------------
Net periodic pension (income) cost $ (9,370) $ 189,270
===============================
</TABLE>
43
<PAGE>
9. RETIREMENT PLANS (CONTINUED)
The following table sets forth the Plans' funded status at December 31 for its
U.S. pension plans:
<TABLE>
<CAPTION>
1995 1994
----------------------------------
<S> <C> <C>
Actuarial present value of accumulated
benefit obligations:
Vested $ 2,069,918 $ 2,088,090
Nonvested 81,054 -
==================================
Accumulated benefit obligation $ 2,150,972 $ 2,088,090
==================================
Projected benefit obligation $ (2,150,972) $(2,088,090)
Plan assets at fair market value 2,630,717 2,282,268
----------------------------------
----------------------------------
Plan assets in excess of projected benefit obligation 479,745 194,178
Unrecognized net loss (gain) (247,065) 27,142
Unrecognized net (asset) obligation (1,003) (1,077)
----------------------------------
Prepaid pension cost $ 231,677 $ 220,243
==================================
</TABLE>
Assumptions used in the accounting as of December 31 were:
<TABLE>
<CAPTION>
1995 1994
---------------------------------
<S> <C> <C>
Discount rate used to measure projected
benefit obligation 8% 8%
Rate of compensation increase used to measure
projected benefit obligation N/A N/A
Expected long-term rate of return on plan assets 8% 8%
</TABLE>
Plan assets are held in a master trust which is administered by Wertheim
Schroder & Co. Plan assets include corporate equity securities, corporate and
government bonds, and money market accounts.
Total U.S. pension income (expense) for the years ended March 31, 1996 and 1995,
was approximately $9,000 and ($189,000), respectively.
44
<PAGE>
10. CONTINGENCIES
Various legal actions and claims are pending against the Company in the ordinary
course of business. In the opinion of management and its legal counsel, the
outcome of these matters will not have a material adverse effect on the
Company's financial position.
11. SALE OF COMPANY
On October 21, 1997, the shareholders of RCI Holdings, Inc. sold all of the
common stock of Roberts Consolidated Industries, Inc. to QEP Co., Inc. for
$12,350,000 in cash, $7,500,000 in 8% subordinated debentures due April 2001 and
five-year warrants to purchase 200,000 shares of QEP common stock. The existing
senior and subordinated debt and other nontrade debt of Holdings including any
accrued interest, and preferred stock, were satisfied at closing. The
transaction is intended to be recorded using the purchase method of accounting
for business combinations.
45
<PAGE>
RCI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, March 31,
1997 1997
-------------------------------
ASSETS
Current Assets:
Cash $ 151,000 $ 114,739
Account Receivable, net 6,374,000 5,951,885
Inventories 5,644,000 5,641,827
Prepaid expenses 210,000 186,885
----------------------------------
Total current assets 12,379,000 11,895,336
Property, plant and equipment, net 3,324,000 3,503,765
Goodwill, net 3,920,000 4,088,786
Other intangible assets, net 657,000 762,017
Investments in joint ventures 50,000 49,724
Other assets 369,000 369,355
---------------------------------
$ 20,699,000 $20,668,983
=================================
SEE ACCOMPANYING NOTE
46
<PAGE>
<TABLE>
<CAPTION>
RCI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEEETS
(UNAUDITED)
September 30, March 31,
1997 1997
---------------------------------------
<S> <C> <C>
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Cash overdraft $ 522,000 $ 476,574
Accounts payable 4,248,000 3,388,170
Accrued liabilities 974,000 1,064,880
Accrued interest 385,000 333,580
Long-term debt due within one year 922,000 887,850
------------------------------------
Total current liabilities 7,051,000 6,151,054
Long-term debt 14,197,000 14,546,301
Deferred tax liability 33,000 27,246
Deferred profit on sale/leaseback 336,000 384,363
Commitments and contingencies
Redeemable preferred stock 2,000,000 2,000,000
Net capital deficiency:
Common stock, $.0001 par value:
Authorized shares - 50,000
Issued and outstanding shares - 20,428 2
Common stock warrants 11,000 10,900
Additional paid-in capital 25,000 25,032
Foreign currency translation adjustments (52,000) (55,924)
Accumulated deficit (2,902,000) (2,419,991)
-----------------------------------
Total net capital deficiency (2,918,000) (2,439,981)
-----------------------------------
Total liabilities and net capital deficiency $20,699,000 $20,668,983
==================================
</TABLE>
SEE ACCOMPANYING NOTE
47
<PAGE>
<TABLE>
<CAPTION>
RCI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-----------------------------------------
<S> <C> <C>
Net sales $ 24,754,000 $ 25,406,000
Cost of sales 21,434,000 21,523,000
-----------------------------------------
Gross profit 3,320,000 3,883,000
------------------------------------------
Cost and expenses:
Selling, general and administrative 2,990,000 3,109,000
Interest 837,000 822,000
------------------------------------------
3,827,000 3,931,000
-----------------------------------------
Loss before provision for taxes
based on income (507,000) (48,000)
Provision for taxes based
on income 0 0
---------------------------------------------
Net loss $ (507,000) $ (48,000)
========================================
</TABLE>
SEE ACCOMPANYING NOTE
48
<PAGE>
<TABLE>
<CAPTION>
RCI Holdings, Inc.
Consolidated Statements of Cash Flows
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30,
1997 1996
---------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (507,000) $ (48,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 639,000 770,000
Reduction in doubtful accounts ------ (56,000)
Deferred income taxes ------ 27,000
Write-down of investment in joint ventures ------ ------
Amortization of deferred gain on
sale/leaseback (48,000) (48,000)
Changes in operating assets and liabilities 444,000 280,000
---------------------------------------------
Total adjustments 1,035,000 973,000
Net cash provided by operating activities 528,000 925,000
INVESTING ACTIVITIES
Purchases of property, plant and equipment (185,000) (456,000)
---------------------------------------------
Net cash used in investing activities (185,000) (456,000)
FINANCING ACTIVITIES
Borrowing of long-term debt 103,000 ------
Payment of long-term debt (438,000) (641,000)
---------------------------------------------
Net cash (used in) provided by financing activities (335,000) (641,000)
Effect of exchange rate changes on cash (17,000) (106,000)
---------------------------------------------
Net (decrease) increase in cash (9,000) (278,000)
Cash (overdrafts) in excess of cash balance:
Beginning of period (362,000) (208,000)
---------------------------------------------
End of period $ (371,000) $ (486,000)
=============================================
</TABLE>
SEE ACCOMPANYING NOTE.
49
<PAGE>
RCI HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim Financial Information
The interim financial data is unaudited; however, in the opinion of the Company,
the interim data includes all adjustments, consisting only of normal recurring
accruals, necessary for a fair statement of the results of the interim periods.
The results of operations for the six months ended September 30, 1997 are not
necessarily indicative of the results that can be expected for the entire fiscal
year ending March 31, 1998. The March 31, 1997 balance sheet was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles.
50
<PAGE>
ITEM 7(b). PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF Q.E.P. CO., INC. AND
RCI HOLDINGS, INC.
Q.E.P. CO., INC. AND RCI HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed balance sheets have
been prepared by taking the August 31, 1997 balance sheet of Q.E.P. Co., Inc.
(the "Company") and the September 30, 1997 balance sheet of RCI Holdings ("RCI")
and giving effect to the acquisition of the stock of RCI by the Company as if it
occurred as of August 31, 1997. The pro forma combined condensed balance sheet
has been prepared for informational purposes only and does not purport to be
indicative of the financial condition that necessarily would have resulted had
this transaction taken place at August 31, 1997.
The following unaudited pro forma consolidated condensed statements of
operations have been prepared by taking the statements of operations for the
year ended February 28, 1997 and the six months ended August 31, 1997 of the
Company and for the year ended March 31, 1997 and the six months ended September
30, 1997 of RCI and giving effect to the acquisition of the stock of RCI as if
it occurred as of the beginning of each period. The revenues and results of
operations included in the unaudited pro forma consolidated condensed statement
of operations for the year ended February 28, 1997 and the six months ended
August 31, 1997 are not considered necessarily to be indicative of anticipated
results of operations for periods subsequent to the transaction, nor are they
considered necessarily to be indicative of the results of operations for the
periods specified had the transaction actually been completed at the beginning
of each period.
These financial statements should be read in conjunction with the notes to the
unaudited pro forma consolidated condensed financial statements, the financial
statements of the Company and related notes thereto (as previously filed on Form
10-K), and the financial statements of RCI and related notes thereto included
herein.
51
<PAGE>
<TABLE>
<CAPTION>
Q.E.P. CO., INC. AND RCI HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997
Q.E.P. RCI Pro Forma Pro Forma
HISTORICAL HISTORICAL ADJUSTMENTS Q.E.P.
------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,333,973 $ 151,000 (a) (2,350,000) $ 2,134,973
Accounts receivable, net of allowance for
doubtful accounts 4,706,414 6,374,000 (b) (743,443) 10,336,971
Note receivable (c) 650,000 650,000
Inventories 6,267,784 5,644,000 -------- 11,911,784
Other current assets 994,138 210,000 -------- 1,204,138
---------------------------- -------------------------------
Total current assets 16,302,309 12,379,000 (2,443,443) 26,237,866
NOTE RECEIVABLE --------- --------- (c) 2,600,000 2,600,000
PROPERTY AND EQUIPMENT, NET 638,942 3,324,000 (d) (1,710,654) 2,252,288
GOODWILL --------- 3,920,000 (e) 2,880,461 6,800,461
DEBT ISSUANCE COSTS, NET --------- 657,000 (i) (657,000) ---------
DEFERRED INCOME TAXES 204,900 --------- (f) 1,000,000 1,204,900
OTHER ASSETS, NET 335,647 419,000 (g) 440,193 1,194,840
-------------------------- ------------------------------
$17,481,798 $20,699,000 $ 2,109,557 $40,290,355
========================== ==============================
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Q.E.P. CO., INC. AND RCI HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Q.E.P. RCI Pro Forma Pro Forma
HISTORICAL HISTORICAL ADJUSTMENTS Q.E.P.
-----------------------------------------------------------------
CURRENT LIABILITIES
<S> <C> <C> <C> <C>
Accounts payable $ 2,905,035 4,770,000 (h) 500,000 8,175,035
Notes payable (n) 2,000,000 2,000,000
Current maturities of long term debt 922,000 (k) 257,857 1,179,857
Accrued management fee 250,000 (l) (250,000)
Accrued interest 385,000 (m) (385,000)
Other current liabilities 17,330 724,000 (p) 56,557 797,887
--------------------------------- -------------------------------
Total current liabilities 2,922,365 7,051,000 2,179,414 12,152,779
TERM LOAN (i) 6,857,143 6,857,143
LONG TERM DEBT 14,197,000 (q) (14,197,000) ---------
SUBORDINATED DEBT (o) 6,515,000 6,515,000
OTHER LIABILITIES 134,194 336,000 (r) (336,000) 134,194
DEFERRED TAXES 33,000 (s) (33,000) ----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock 336,660 2,000,000 (t) (2,000,000) 336,660
Common stock 2,655 2,655
Additional paid-in capital 8,485,519 25,000 (t) (25,000) 8,485,519
Retained earnings (deficit) 5,658,305 (2,902,000) (t) 2,902,000 5,658,305
Common stock warrants 11,000 (t) 195,000 206,000
Foreign currency translation adjustments (52,000) (t) 52,000
Treasury stock (57,900) (57,900)
---------------------------- --------------------------------
14,425,239 (918,000) 1,124,000 14,631,239
---------------------------- --------------------------------
$17,481,798 $20,699,000 $ 2,109,557 $40,290,355
============================ ================================
See accompanying notes to Unaudited ProForma Condensed Consolidated Financial
Statements
</TABLE>
53
<PAGE>
Q.E.P. CO., INC. AND RCI HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1997
<TABLE>
<CAPTION>
Q.E.P. RCI Pro Forma Pro Forma
HISTORICAL HISTORICAL ADJUSTMENTS Q.E.P.
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $33,140,273 $49,457,124 (1) (1,735,454) $80,861,943
Cost of Sales 20,118,824 39,584,654 (1) (1,735,454) 57,968,024
-------------------------------------------------------------------
Gross Profit 13,021,449 9,872,470 22,893,919
Operating expenses
Shipping 2,440,535 3,013,672 5,454,207
Selling, General and administrative 7,628,346 6,346,332 (2) (1,326,869) 12,647,809
--------------------------------------------------------------------
Total operating expenses 10,068,881 9,360,004 (1,326,869) 18,102,016
Other income (expense)
Interest expense (7,250) (1,680,821) (3) 255,821 (1,432,250)
--------------------------------------------------------------------
Income (loss) before income taxes 2,945,318 (1,168,355) 1,582,690 3,359,653
---------------------------------------------------------------------
Provision (benefit) for income taxes 1,142,577 81,532 (4) 237,434 1,461,543
NET INCOME (LOSS) $ 1,802,741 $(1,249,887) $ 1,345,256 $ 1,898,110
====================================================================
Net income per share $ 0.89 $ .94
=====================================================================
Weighted average shares outstanding 2,015,268 2,015,628
====================================================================
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
<TABLE>
<CAPTION>
Q.E.P. CO., INC. AND RCI HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED AUGUST 31, 1997
Q.E.P. RCI Pro Forma Pro Forma
HISTORICAL HISTORICAL ADJUSTMENTS Q.E.P.
<S> <C> <C> <C> <C>
Net Sales $17,388,257 $24,754,000 (a) $ (671,266) $41,470,991
Cost of Sales 10,868,872 19,848,000 (a) (671,266) 30,045,606
--------------------------- -------------------------------
Gross Profit 6,519,385 4,906,000 ------ 11,425,385
Operating expenses
Shipping 1,379,807 1,586,000 2,965,807
Selling, General and Administrative 3,745,968 2,990,000 (b) (696,196) 6,039,772
---------------------------- -------------------------------
Total operating expenses 5,125,775 4,576,000 (696,196) 9,005,579
Other income (expense
Interest income (expense) 115,180 (837,000) (c) 127,910 (593,910)
---------------------------- ------------------------------
Income (loss) before income taxes 1,508,790 (507,000) 824,106 1,825,896
Provision (benefit) for income taxes 588,428 (d) 161,600 750,028
-------------------------- ------------- ----------------
NET INCOME (LOSS) $ 920,362 $ (507,000) $ 662,506 $ 1,075,868
============================ =============================
Net income per share $ 0.34 $ 0.40
============================ ==============================
Weighted average shares outstanding 2,664,567 2,664,567
============================ ==============================
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
54
<PAGE>
Q.E.P. CO., INC. and RCI HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated balance sheets and
statements of operations present the financial position and results of
operations of Q.E.P. CO., Inc. (the "Company") giving effect to the acquisition
on October 21, 1997 of 100% of the outstanding common stock of RCI Holdings,
Inc. ("RCI"). The Pro Forma information is presented for illustrative purposes
only and is not necessarily indicative of the financial position or results of
operations which would actually have been reported had the transaction been in
effect during the periods presented or which may be reported in the future. The
results of operations for the six months ended August 31, 1997 are not
necessarily indicative of the results of operations to be expected for the full
year.
At closing, the Company paid the RCI shareholders $12,350,000 in cash. The
balance of the purchase price consisted of: (i) issuance of $7,500,000 8%
subordinated debt, due April 1, 2001 which has been recorded net of debt issue
discount and (ii) issuance of 200,000 warrants to purchase common stock (valued
at $206,000). The pro forma financial statements reflect these amounts.
In connection with the acquisition, the Company sold certain assets of RCI to an
unrelated entity. The Company received a $3,750,000 note receivable, which has a
net present value of $3,250,000.
The adjustments below were prepared based on data currently available and in
some cases are based on estimates or approximations. It is possible that the
actual amounts to be recorded may have an impact on the results of operations
and the balance sheet different from that reflected in the accompanying
unaudited pro forma condensed consolidated financial statements. It is therefore
possible that the entries presented below will not be the amounts actually
recorded at the closing date.
55
<PAGE>
Q.E.P. CO., INC. AND RCI HOLDINGS, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS AT AUGUST 31, 1997
<TABLE>
<CAPTION>
<S> <C>
(a) Cash
Record amount of purchase price paid in cash $ (12,350,000)
Record use of line of credit 2,000,000
Record term loan obtained to finance purchase 8,000,000
------------
$ (2,350,000)
-------------
(b) Accounts receivable
Record elimination of intercompany accounts $ (443,443)
Record and increase the reserve for credit notes and bad debts (300,000)
--------------
$ (743,443)
--------------
(c) Notes receivable
Record note received upon sale of assets, net $ 3,250,000
Reclass current portion of note (650,000)
-------------
$ 2,600,000
=============
(d) Fixed assets
Record sale of certain assets $ (1,710,654)
(e) Goodwill
Additional cost in excess of net assets acquired $ 9,280,000
Adjust basis upon sale of assets (1,539,346)
Write-off RCI goodwill (3,920,000)
Record deferred tax asset (1,000,000)
Adjust other assets for pension assets in excess of projected benefits (440,193)
Record and estimate amounts for environmental and severance liabilities 500,000
-------------
$ 2,880,461
-------------
(f) Deferred tax asset
Record deferred tax asset $ 1,000,000
(g) Other Assets
To record adjustment for Plan assets in excess of projected
benefit obligation $ 440,193
(h) Accounts Payable
Record estimate of environmental and severance liabilities $ (500,000)
-
(i) Debt issuance costs
Write-off balance of debt issuance costs associated with the
debt discharged upon acquisition $ (657,000)
(j) Term loan
Record bank term loan due October 1, 2004 $ 8,000,000
Less current portion (1,142,857)
-------------
$ 6,857,143
-------------
(k) Current Maturities of Long Term Debt
Record elimination of short term portion of Roberts debt $ (885,000)
Record new current maturities of short term debt 1,142,857
-------------
$ 257,857
-------------
(l) Accrued management fees
To eliminate accrued management fees of RCI $ (250,000)
(m) Accrued interest
To eliminate accrued interest of RCI $ (385,000)
(n) Notes payable
Record draw down on bank line to finance purchase $ 2,000,000
</TABLE>
56
<PAGE>
Q.E.P. CO., INC. AND RCI HOLDINGS, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE SHEETS AT AUGUST 31, 1997
<S> <C>
(o) Subordinated debt
Record issuance of 8% subordinated debentures due April 1, 2001 $ 7,500,000
Less debt issue discount (985,000)
-------------
$ 6,515,000
------------
(p) Other Current Liabilities
Acquisition and related fees $ 500,000
Record elimination of intercompany balance (443,443)
------------
$ 56,557
------------
(q) Long term debt
Record elimination of long term portion of debt $(14,197,000)
(r) Deferred Gain
To eliminate RCI other liabilities $ (336,000)
(s) Deferred Taxes
To remove RCI deferred taxes $ (33,000)
(t) Stockholders' equity
To eliminate stockholders' deficiency of RCI $ 918,000
To record issuance of warrants in connection with the acquisition 206,000
-------------
$ 1,124,000
-------------
</TABLE>
57
<PAGE>
Q.E.P. CO., INC. AND RCI HOLDINGS, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1997
<TABLE>
<CAPTION>
<S> <C>
(1) Net Sales
To eliminate intercompany sales $(1,735,454)
(2) General and administrative expenses
Remove Depreciation related to the sale of assets $ (152,000)
Remove amortization of RCI intangibles (553,000)
To remove compensation of RCI president offset by other payroll increases (475,000)
To amortize goodwill over useful life (35 years) 194,470
To record additional expenses related to sales, marketing and travel 25,000
To remove mananagement fee charged (366,339)
------------
$(1,326,869)
============
(3) Interest expense
To record interest due on subordinated debt $ 600,000
To record interest on note payable and term loan 725,000
To remove interest on RCI notes (1,680,821)
To reduce interest income based on amounts paid in cash 100,000
------------
$ (255,821)
============
(4) Provision (benefit) for Income Taxes
To adjust tax provision/(benefit) on a consolidated basis $ (230,566)
To adjust deferred taxes for use of preacquisition NOL 468,000
------------
237,434
============
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Q.E.P. CO., INC AND RCI HOLDINGS, INC.
Notes to Unaudited Pro Forma Consolidated Statements of Operations
Statement of Operations
For the Six Month Period Ended August 31, 1997
<S> <C> <C>
(a) Net Sales
To eliminate intercompany sales $ (671,276)
(b) General and Administrative expenses
To remove depreciation related to the sale of assets $ (119,546)
Remove amortization of RCI intangibles (276,000)
To remove compensation of President offset by
other payroll increases (170,000)
To amortize Goodwill based on useful life (35 years) 97,235
To remove management fee charged (227,885)
-----------
$ (696,196)
===========
(c) Interest expense
To record interest due on subordinated debt at 8% $ 300,000
To record interest on note payable and term loan at 7.25% 362,500
To remove interest on RCI notes (840,410)
To reduce interest income based on amounts paid in cash 50,000
-----------
$ (127,910)
===========
(d) Provision (benefit) for Income Taxes
To adjust tax provision/(benefit) on a consolidated basis $ ( 72,400)
To adjust deferred taxes for use of preacquisition NOL 234,000
-----------
161,600
===========
</TABLE>
59
