FORM 10-Q
Securities and Exchange Commission
Washington D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: August 31, 1998
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 6, 1998: 2,654,894 shares of common stock, par value
$.001 per share.
<PAGE>
Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets (Unaudited)
August 31, 1998 and February 28, 1998.......................... 3
Consolidated Statements of Income (Unaudited)
For the Six and Three Months Ended August 31, 1998 and 1997.... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended August 31, 1998 and 1997.............. 5
Notes to Consolidated Financial Statements............................. 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations........................... 8
Item 3 - Qualitative and Quantitative Disclosures about Market Risk... 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 13
Item 4 - Submission of Matters to a Vote of Security Holders.......... 13
Item 6 - Exhibits and Reports on Form 8-K............................. 14
Signatures............................................................ 15
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 AND FEBRUARY 28, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 31, 1998 FEBRUARY 28, 1998
--------------- -----------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents.................................................. $ 274,000 $ 239,984
Accounts receivable, less allowance for
doubtful accounts of $437,000 and $480,000 at
August 31, 1998 and February 28, 1998................................... 14,561,627 12,791,483
Notes receivable........................................................... 741,072 688,272
Inventories................................................................ 11,653,739 11,487,463
Prepaid expenses........................................................... 1,297,835 1,365,027
Deferred Income Taxes...................................................... 562,000 1,029,038
------------- ---------------
Total current assets.................................................... 29,090,273 27,601,267
PROPERTY AND EQUIPMENT, NET...................................................... 2,986,840 2,696,386
DEFERRED INCOME TAXES............................................................ 1,181,860 1,125,845
INTANGIBLE ASSETS, NET........................................................... 8,205,445 8,033,978
NOTES RECEIVABLE................................................................. 2,190,482 2,567,271
OTHER ASSETS..................................................................... 720,531 1,001,141
------------- ---------------
TOTAL ASSETS .................................................................... $ 44,375,431 $ 43,025,888
============= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit and short term debt........................................ $ 4,783,365 $ 4,246,452
Current maturities of long term debt....................................... 1,142,857 1,142,319
Accounts payable........................................................... 4,557,157 4,902,485
Accrued liabilities........................................................ 3,503,268 2,958,717
Deferred income taxes...................................................... 149,730 139,078
------------- ---------------
Total current liabilities............................................... 14,136,377 13,389,051
NOTES PAYABLE.................................................................... 6,247,073 6,788,219
SUBORDINATED LONG TERM DEBT...................................................... 6,755,244 6,611,098
DEFERRED INCOME TAXES............................................................ 623,189 604,445
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, 2,500,000 shares authorized, $1.00 par value; 336,660
shares issued and outstanding at August 31, 1998 and February 28, 1998.. 336,660 336,660
Common stock, 10,000,000 shares authorized, $.001 par value; 2,654,894
shares issued and outstanding at August 31, 1998 and February 28, 1998.. 2,655 2,655
Additional paid-in capital................................................. 8,746,876 8,746,876
Retained earnings.......................................................... 7,860,257 6,736,712
Cost of stock held in treasury............................................. ( 57,900) (57,900)
Accumulated other comprehensive income..................................... (275,000) (131,928)
------------- ---------------
$ 16,613,548 $ 15,633,075
------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................................... $ 44,375,431 $ 43,025,888
============= ===============
</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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
AUGUST 31, 1998 AUGUST 31, 1997 AUGUST 31, 1998 AUGUST 31, 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Sales............................ $ 49,082,384 $ 17,388,257 $ 24,881,238 $ 7,842,353
Cost of goods sold................... 34,744,347 10,868,872 17,702,008 4,979,352
------------ ------------ ------------ -----------
Gross profit....................... 14,338,037 6,519,385 7,179,230 2,863,001
Costs and expenses...................
Shipping........................... 3,508,566 1,379,807 1,783,729 639,553
General and administrative......... 4,203,199 1,859,890 2,242,587 828,747
Selling and marketing.............. 3,957,702 1,881,636 1,991,240 814,752
Other expenses..................... 31,033 4,442 13,262 1,679
------------ ------------ ------------ -----------
Operating income..................... 2,637,537 1,393,610 1,148,412 578,270
Interest income...................... 60,152 143,486 28,364 83,953
Interest expense..................... (892,740) (28,306) (447,616) (13,894)
------------ ------------ ------------ -----------
Income before provision for income
taxes................................ 1,804,949 1,508,790 729,160 648,329
Provision for income taxes........... 678,902 588,428 249,615 252,848
------------ ------------ ------------ -----------
NET INCOME........................... $ 1,126,047 $ 920,362 $ 479,545 $ 395,481
============ ============ ============ ===========
Basic and diluted net income per
common share......................... $0.42 $0.34 $0.18 $0.15
Weighted average number of shares 2,704,266 2,665,119 2,705,873 2,670,510
outstanding.......................... ============ ============ ============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
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Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31, 1998 AUGUST 31, 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 1,126,047 $ 920,362
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of equipment.......................................... (79,049) 0
Depreciation and amortization...................................... 582,776 29,131
Bad debt expense................................................... 179,775 10,921
Deferred income taxes.............................................. 440,419 43,100
Stock option compensation.......................................... 0 51,800
Changes in assets and liabilities:
Accounts receivable.............................................. (1,949,919) 790,474
Inventories...................................................... (219,257) (1,571,384)
Other current assets............................................. 67,192 (568,560)
Other assets..................................................... 28,729 (98,633)
Accounts payable and accrued liabilities......................... 199,222 90,649
--------------- ------------
Net cash provided by (used in) operating activities.............. 375,935 (302,140)
--------------- ------------
Cash flows from investing activities:
Capital expenditures............................................... (585,676) (265,018)
Proceeds from sale of fixed assets................................. 80,734 0
--------------- ------------
Net cash used in investing activities............................ (504,942) (265,018)
--------------- ------------
Cash flow from financing activities:
Net borrowings under lines of credit............................. 476,820 0
Repayments of long-term debt..................................... (582,671) 0
Payments on notes receivable..................................... 414,448 0
Dividends........................................................ (2,502) 0
--------------- ------------
Net cash provided by financing activities........................ 306,095 0
--------------- ------------
Translation adjustment................................................. (143,072) 0
Net increase (decrease) in cash........................................ 34,016 (567,158)
Cash and cash equivalents at beginning of period....................... 239,984 4,901,131
--------------- ------------
Cash and cash equivalents at end of period............................. $ 274,000 $ 4,333,973
=============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid.................................................... $ 390,569 $ 0
Income taxes paid................................................ $ 50,000 $ 638,500
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
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Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. BASIS OF PRESENTATION
The accompanying financial statements for the interim periods are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the periods
presented. These financial statements should be read in conjunction with the
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations, contained in the
Annual Report on Form 10-K for the year ended February 28, 1998, of Q.E.P. Co.,
Inc. (the "Company") as filed with the Securities and Exchange Commission. The
February 28, 1998 balance sheets were 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, 1998 are not necessarily indicative of the results for the full fiscal year
ending February 28, 1999.
Note 2. ACQUISITIONS
On October 21, 1997, pursuant to a Stock Purchase Agreement dated as of
the same date between the Registrant and RCI Holdings, Inc., a Delaware
corporation (the "Seller"), the Registrant purchased (the "Roberts Acquisition")
all of the issued and outstanding stock of Roberts Consolidated Industries, Inc.
("Roberts"), a Delaware corporation and wholly owned subsidiary of the Seller.
Roberts is engaged in the manufacture and sale of carpet installation products,
including carpet adhesives and installation tools. Roberts operates three leased
manufacturing facilities: one in City of Industry, California; one in Mexico,
Missouri; and one in Bramalea, Ontario, Canada.
Additionally, effective December 31, 1997, the Company acquired all of
the issued and outstanding shares of Roberts Holland B.V. together with all
licenses and intellectual property.
The following unaudited pro forma consolidated results of operations of
the Company assume the acquisitions had occurred March 1, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, 1997 AUGUST 31, 1997
--------------- ---------------
<S> <C> <C>
Sales................................................ $ 22,638,995 $ 46,064,214
Net income........................................... $ 333,280 $ 651,328
Net income per common share.......................... $ .12 $ .24
</TABLE>
The unaudited pro forma results have been prepared for comparative
purposes only and include adjustments to show interest expense relating to new
debt and other general and administrative charges expected to occur as a result
of the acquisitions and to eliminate intercompany transactions. The results are
not necessarily indicative of what actually would have occurred if the
acquisitions had been in effect for the entire period presented.
6
<PAGE>
Note 3. INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1998 FEBRUARY 28, 1998
--------------- -----------------
<S> <C> <C>
Raw materials and work-in-progress................... $ 3,958,787 $ 3,896,608
Finished goods....................................... 7,694,952 7,590,855
------------- ----------------
$ 11,653,739 $ 11,487,463
============= ================
</TABLE>
Note 4. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128 - "Earnings Per Share" ("FAS 128") which requires the dual presentation of
basic and diluted earnings per share for the periods ending after December 15,
1997. Basic earnings per share is computed by dividing net income, after
deducting preferred stock dividends accumulated during the period, by the
weighted average number of shares of common stock outstanding during each
period. For the six months and the three months ended August 31, 1998 and August
31, 1997, the weighted average number of shares of common stock outstanding
amounted to 2,654,894. Diluted earnings per share is computed by dividing net
income by the weighted average number of shares of common stock, common stock
equivalents and other potentially dilutive securities outstanding during each
period. For the six months ended August 31, 1998 and August 31, 1997, the
weighted average number of shares of common stock outstanding amounted to
2,704,266 and 2,665,119 respectively. For the three months ended August 31, 1998
and August 31, 1997, the weighted average number of shares of common stock
outstanding amounted to 2,705,873 and 2,670,510 respectively. In accordance with
the provisions of FAS 128, the Company has retroactively restated earnings per
share.
Note 5. COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This pronouncement sets forth requirements for disclosure of the
Company's comprehensive income and accumulated other comprehensive items. In
general, comprehensive income combines net income and "other comprehensive
items," which represent certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheets, including foreign
currency translation adjustments. For the six months ended August 31, 1998 and
August 31, 1997, the Company's comprehensive income totaled $982,974 and
$920,362 respectively. For the three months ended August 31, 1998 and August 31,
1997, comprehensive income amounted to $300,545 and $395,481 respectively.
Note 6. FUTURE EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") was issued in June 1997. This statement changes
the way public companies report information about segments of their business in
their annual financial statements. This statement is effective for the Company's
fiscal year ending February 28, 1999. However, information is not to be
presented for interim financial statements in the first year of implementation.
Adoption of SFAS No. 131 is not expected to have a material effect on the
Company's financial statement disclosures.
Note 7. RECLASSIFICATIONS
Certain amounts in the 1997 presentation have been reclassified to
conform to the 1998 presentation.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Q.E.P. Co., Inc. ("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, 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. Dollar figures
set forth below are rounded to the nearest thousand.
This report on Form 10-Q 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, the
successful integration of the Roberts Consolidated acquisition, and the risk of
economic and market factors affecting the Company or its customers.
RESULTS OF OPERATIONS
SIX MONTHS ENDED AUGUST 31, 1998 COMPARED TO SIX MONTHS ENDED AUGUST 31,
1997
Net sales for the six months ended August 31, 1998 (the "fiscal 1999
period") were approximately $49,082,000, compared to approximately $17,388,000
for the six months ended August 31, 1997 (the "fiscal 1998 period"), an increase
of $31,694,000 or 182.2%. This increase was primarily the result of sales from
the Company's newly acquired subsidiaries, Roberts Consolidated Industries, Inc.
("Roberts Consolidated") and Roberts Holland B.V. ("Roberts Holland")
(collectively the "fiscal 1998 acquisitions"). Although selling prices remained
relatively stable, there was an increase in the volume of sales to home center
retailers and independent distributors. This was due to an increase in market
penetration by these customers and new store openings by major home center chain
customers.
Gross profit for the fiscal 1999 period was approximately $14,338,000,
compared to $6,519,000 for the fiscal 1998 period, an increase of $7,819,000 or
119.9%. As a percentage of net sales, gross profit decreased to 29.2% in the
fiscal 1999 period from 37.5% in the fiscal 1998 period. This decrease was a
result of the acquisition of Roberts Consolidated and Roberts Holland whose
products have historically had lower gross profit margins than the Company.
Shipping expenses for the fiscal 1999 period were approximately
$3,509,000, compared to $1,380,000 for the fiscal 1998 period, an increase of
$2,129,000 or 154.3%. As a percentage of net sales, these expenses decreased to
7.2% in the fiscal 1999 period from 7.9% in the fiscal 1998 period.
Approximately 83% of the increase in shipping expenses was the result of the
Company's fiscal 1998 acquisitions, and the balance was attributable to
increased sales volume. Shipping expenses as a percentage of sales decreased due
to freight costs as a percentage of sales being lower at the acquired companies.
General and administrative expenses for the fiscal 1999 period were
approximately $4,203,000, compared with approximately $1,860,000 for the fiscal
1998 period, an increase of $2,343,000 or 126%. As a percentage of net sales,
these expenses decreased to 8.6% in the fiscal 1999 period from 10.7% in the
fiscal 1998 period, reflecting the leveraging of these costs over greater sales.
The actual increase in these expenses was predominantly the result of costs
associated with the addition of the personnel for Roberts Consolidated and
Roberts Holland.
8
<PAGE>
Selling and marketing costs for the fiscal 1999 period were
approximately $3,958,000, compared to $1,882,000 for the fiscal 1998 period, an
increase of $2,076,000 or 110.3%. As a percentage of net sales, these expenses
decreased to 8.1% in the fiscal 1999 period from 10.8% in the fiscal 1998
period. The percentage decrease was a result of lower selling and marketing
costs as a percentage of sales at Roberts Consolidated. This was a result of the
small sales force maintained by Roberts Consolidated prior to the acquisition.
The increase in these expenses is attributable to the Company's fiscal 1998
acquisitions.
Interest income for the fiscal 1999 period was approximately $60,000
compared to $143,000 in fiscal 1998. Interest expense for the fiscal 1999 period
was approximately $893,000 compared to approximately $28,000 in fiscal 1998.
Interest income was higher in the prior period because the Company invested its
excess cash which was primarily available prior to the acquisition of Roberts
Consolidated. Interest expense increased as a result of the increase in
borrowings associated with the 1998 acquisitions.
Provision for income taxes was approximately $679,000 in the fiscal
1999 period, compared to approximately $588,000 in the fiscal 1998 period, an
increase of $90,000 or 15.4%. The effective tax rate was approximately 37.6% for
the fiscal 1999 period compared to 39.0% for the fiscal 1998 period. The
effective tax rate is based upon the most recent effective tax rates available.
Net income for the fiscal 1999 period increased to $1,126,000 from
$920,000 in the fiscal 1998 period, an increase of $206,000 or 22.4%. Net income
as a percentage of net sales decreased to 2.3% in fiscal 1999 compared to 5.3%
in fiscal 1998, reflecting a lower gross profit margin, higher interest expenses
and lower interest income, offset by lower shipping, general and administrative,
and selling and marketing expenses as a percentage of sales as described above.
THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE
MONTHS ENDED AUGUST 31, 1997.
Net sales for the three months ended August 31, 1998 (the "fiscal 1999
period") were approximately $24,881,000, compared to approximately $7,842,000
for the three months ended August 31, 1998 (the "fiscal 1998 period"), an
increase of $17,039,000 or 217.3%. Of the total increase, $15,777,000 represents
sales from the Company's fiscal 1998 acquisitions.
Gross profit for the fiscal 1999 period was approximately $7,179,000,
compared to approximately $2,863,000 in the fiscal 1998 period, an increase of
$4,316,000 or 150.8%. As a percentage of net sales, gross profit decreased from
36.5% in fiscal 1998 to 28.9% in fiscal 1999 due to lower gross profits
associated with sales of products from Roberts Consolidated and Roberts Holland.
Shipping expenses for the fiscal 1999 period were approximately
$1,784,000, compared to approximately $640,000 for the fiscal 1998 period, an
increase of $1,144,000 or 178.8%. As a percentage of net sales, these expenses
decreased to 7.2% in the fiscal 1999 period from 8.2% in the fiscal 1998 period.
The actual increase was the result of increased sales volume due to the fiscal
1998 acquisitions. The percentage decrease is due to lower freight costs
incurred by the acquired companies.
General and administrative expenses for the fiscal 1999 period were
approximately $2,243,000, compared to approximately $829,000 for the fiscal 1998
period, an increase of $1,414,000 or 170.6%. As a percentage of net sales,
general and administrative expenses decreased from 10.6% in fiscal 1998 to 9.0%
in fiscal 1999, reflecting the leveraging of these costs over greater sales. Of
the total increase, approximately $940,000 represents general and administrative
expenses incurred by the newly acquired subsidiaries. The remainder of the
increase is as a result of costs associated with the Company's integration of
the Roberts Consolidated and Roberts Holland administrative and operating
functions. Approximately $150,000 of these expenses represent certain one-time
operating charges incurred in connection with the relocation of Company
personnel to corporate headquarters, the write-off of certain accounts
receivable balances, and payroll expenses as a result of hiring new management
personnel.
9
<PAGE>
Selling and marketing costs for the fiscal 1999 period were
approximately $1,991,000, compared to approximately $815,000 for the fiscal 1998
period, an increase of $1,176,000 or 144.4%. As a percentage of net sales, these
expenses decreased to 8.0% in the fiscal 1999 period from 10.4% in the fiscal
1998 period. Approximately 96% of the increase in selling and marketing expenses
in the second quarter of fiscal 1999 compared to the same period in the prior
year is attributable to the Company's fiscal 1998 acquisitions. The percentage
decrease is as a result of lower selling and marketing costs as a percentage of
sales at Roberts Consolidated.
Interest income, for the fiscal 1999 period was approximately $28,000,
compared to $84,000 for the fiscal 1998 period. Interest expense for the fiscal
1999 period was approximately $448,000 compared to approximately $14,000 in
fiscal 1998. Interest income was higher in the prior period because the Company
invested its excess cash, which was primarily available prior to the acquisition
of Roberts Consolidated. Interest expense increased as a result of the increase
in borrowings associated with the acquisitions.
Provision for income taxes was approximately $250,000 in the fiscal
1999 period, compared to approximately $253,000 for the fiscal 1998 period, a
decrease of $3,000 or 1.2%. The effective tax rate was approximately 34.2% for
the fiscal 1999 period compared to 39.0% for the fiscal 1998 period. The change
in the effective tax rates reflect the differences in tax rates at the Company's
different subsidiaries, certain of which were acquired by the Company in the
fiscal 1998 period.
As a result of the above, net income for the fiscal 1999 period was
approximately $480,000, compared to approximately $395,000 for the fiscal 1998
period, an increase of $84,000 or 21.5%.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of August 31, 1998 increased from approximately
$14,212,000 at February 28, 1998 to $14,954,000, an increase of $742,000,
primarily as a result of the Company's operations. Any cash in excess of
anticipated requirements is invested in commercial paper or overnight repurchase
agreements with a financial institution. The Company states the value of such
investments at market price and classifies them as cash equivalents on its
balance sheet.
Net cash provided by operating activities during the six month period
ended August 31, 1998 was $376,000 compared to a use in cash of $302,000 for the
comparable period in fiscal 1998. The increase in cash provided by operating
activities was primarily as a result of an increase in income from operations,
offset by an increase in accounts receivable, which was associated with an
increase in sales. Net cash used in investing activities was $505,000 compared
to $265,000 for the comparable period in fiscal 1998, primarily due to the
purchase of computer equipment.
Net cash provided by financing activities was $306,000 compared to zero
in the comparable period in fiscal 1998 due primarily to repayments made on the
Company's term loan, offset by increased borrowings predominately under the
foreign line of credit (as hereafter defined). These credit facilities did not
exist in the prior period.
The Company has a revolving credit and term loan facility with one
financial institution. The revolving credit facility permits borrowings of up to
$10,000,000 against a fixed percentage of eligible accounts receivable and
inventory as defined. Interest is payable at LIBOR plus 1.25% (6.9% at August
31, 1998). The revolving credit agreement terminates July 25, 2000. The credit
facility is collateralized by receivables, inventories, equipment and certain
real property. Under the terms of the agreement, the Company is required to
maintain certain financial ratios and other financial conditions. The agreement
also prohibits the Company from incurring certain additional indebtedness,
limits certain investments, advances or loans and restricts substantial asset
sales and capital expenditures. The terms of the Company's bank credit facility
also prohibits the payment of dividends except with the lender's consent. The
Company had $5,158,000 available for future borrowings at August 31, 1998. In
connection with the acquisition of Roberts Consolidated, the Company issued
$7,500,000 of subordinated debentures. These debentures mature on April 1, 2001
and bear interest at 8%. They were recorded at their fair value on the date of
issuance in the amount of $6,515,000 and the
10
<PAGE>
discount will be amortized over the life of the debentures. The Company also has
a short term credit line with a European financial institution utilized by
Roberts Holland, which permits borrowings of up to $2,500,000 ("Foreign Line of
Credit"). The borrowings are collateralized by accounts receivable, inventory,
machinery and equipment and a standby letter of credit from the Company's
domestic financial institution.
The Company believes its existing cash balances, internally generated
funds from operations and its available bank lines 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.
MANAGEMENT INFORMATION SYSTEMS - YEAR 2000
The Company upgraded its domestic management information systems during
fiscal 1998, which among other things ensured proper processing of transactions
relating to the Year 2000 and beyond. The Company continues to evaluate
appropriate courses of action, including the effect of Year 2000 on the
Company's telecommunications system and replacement of certain systems at its
foreign locations. The Company does not expect the costs associated with Year
2000 compliance of its foreign subsidiary or any necessary upgrades with respect
to the Company's telecommunication system to have a material effect on its
financial position or results of operations. All costs for corrective actions
associated with Year 2000 compliance will be funded with cash flow generated
from operations and expensed as incurred.
The Company participates in the electronic data interchange program
maintained by many of its larger customers, including Home Depot, Lowe's,
HomeBase and Hechinger/Builders Square. The Company's principal customers have
provided written notification advising the Company that they are in the process
of addressing Year 2000 compliance. Failure by any of these principal customers
to adequately address these Year 2000 issues, could have a material adverse
effect on the Company.
In addition, the Company will begin contacting its significant suppliers and
other service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. Accordingly, the Company is not yet in a position to fully assess any
third party's compliance efforts with the Year 2000 issues or the actual
expected impact on the Company if any third party's Year 2000 compliance efforts
fail. However, based upon preliminary analysis, the Company does not believe
that the costs, if any, that the Company would incur as a result of any failure
of its suppliers to address their Year 2000 issues would have a material adverse
effect on its financial position or result of operations. This assessment is
based upon a preliminary inquiry into this matter, management may determine that
this assessment is incorrect.
RISKS OF YEAR 2000 ISSUES
The costs associated with Year 2000 compliance of the Company's foreign
subsidiary and the costs associated with any Year 2000 non-compliance on the
part of third parties with which the Company does business are based on
management's best estimates, utilizing numerous assumptions of future events
including the continued availability of certain resources, the existence of
third party modification and contingency plans and other factors. However, there
can be no guarantee that those estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, the ability of, and the resources available to, third
parties on which the Company relies to address Year 2000 issues, and similar
uncertainties.
CONTINGENCY PLANS
In an attempt to mitigate the above risks, the Company will develop
contingency plans for its foreign locations and any unplanned interruptions
arising from the date change as well as from the failure of any third party's
compliance.
11
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of its business. In the opinion of management, no material legal
proceedings are pending to which the Company or any of its property is subject.
Roberts Consolidated has been named as a defendant in CARGILL, INC. ET
AL. V. ABCO CONSTRUCTION ET AL., a lawsuit filed in the United States District
Court for the Southern District of Ohio Western Division on January 29, 1998.
The lawsuit, brought under CERCLA and related state environmental laws, alleges
that Roberts Consolidated and the other defendants disposed of hazardous
substances at a site located in Dayton, Ohio. The plaintiffs are seeking
monetary damages against the defendants, primarily in an amount equal to their
respective equitable share of the cost of the environmental clean up of the
site. The Company previously reported that based on preliminary investigations,
it believed that the entity identified as Roberts Consolidated, named a
defendant in this lawsuit, was neither the same entity nor a predecessor to the
entity acquired by the Company. The Company has learned that the successor in
interest to the Roberts Consolidated which owned "the facility" in question, has
responded to the complaint. Based on this information, the Company believes that
it should have no further involvement in this matter.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on July 17, 1998. The
following matters were voted upon at the Annual Meeting:
(i) The election of the following five members to the Company's Board of
Directors:
Mervyn D. Fogel votes for: 2,465,859 votes withheld: 3,900
Lewis Gould votes for: 2,465,859 votes withheld: 3,900
William P. Killian votes for: 2,465,859 votes withheld: 3,900
Norman R. Snesil votes for: 2,465,859 votes withheld: 3,900
Emil Vogel votes for: 2,465,659 votes withheld: 4,100
There were no broker non-votes on this proposal.
(ii) The ratification of the appointment of Grant Thornton LLP as the Company's
independent certified public accountants for 1999:
For: 2,469,059
Against: 500
Abstain: 500
There were no broker non-votes on this proposal.
13
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1.1 Stock Purchase Agreement dated October 21, 1997 between the
Company and RCI Holdings, Inc. *
3.1 Certificate of Incorporation of the Company**
3.2 By-Laws of the Company ***
4.1 Specimen Common Stock Certificate **
4.1.1 Form of Warrant issued by the Company to the representative of
the underwriters of the Company's initial public offering**
27 Financial Data Schedule (SEC use only)
* Incorporated by reference to Exhibit 2.1 filed with the Company's
Report on Form 8-K filed on November 3, 1997.
** Incorporated by reference to Exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (Reg. No. 333-07477).
*** Incorporated by reference to Exhibit of the same number filed with the
Company's Annual Report on Form 10-K filed on May 28, 1997.
(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, 1998.
14
<PAGE>
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 13, 1998 By: /S/ LEWIS GOULD
---------------
Lewis Gould, President, Chief Executive Officer
and Director (Principal Executive Officer)
Dated: October 13, 1998 By: /S/ MARC P. APPLEBAUM
---------------------
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule
16
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 274,000
<SECURITIES> 0
<RECEIVABLES> 14,561,627
<ALLOWANCES> (437,000)
<INVENTORY> 11,653,739
<CURRENT-ASSETS> 29,090,273
<PP&E> 2,986,840
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,375,431
<CURRENT-LIABILITIES> 14,136,377
<BONDS> 0
0
336,660
<COMMON> 2,655
<OTHER-SE> 16,274,233
<TOTAL-LIABILITY-AND-EQUITY> 44,375,431
<SALES> 49,082,384
<TOTAL-REVENUES> 49,082,384
<CGS> 34,744,347
<TOTAL-COSTS> 11,700,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 892,740
<INCOME-PRETAX> 1,804,949
<INCOME-TAX> 678,902
<INCOME-CONTINUING> 1,126,047
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,126,047
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
