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: November 30, 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 January 6, 1999: 2,654,894 shares of common stock, par value
$.001 per share.
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Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets (Unaudited)
November 30, 1998 and February 28, 1998............... 3
Consolidated Statements of Income (Unaudited)
For the Nine and Three Months Ended November 30,
1998 and 1997......................................... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended November 30, 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
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................ 13
Item 6 - Exhibits and Reports on Form 8-K......................... 13
Signatures........................................................ 14
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
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Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND FEBRUARY 28, 1998
(UNAUDITED)
NOVEMBER 30, 1998 FEBRUARY 28, 1998
----------------- ----------------
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ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................... $ 995,784 $ 239,984
Accounts receivable, less allowance for
doubtful accounts of $437,000 and $480,000 at
November 30, 1998 and February 28, 1998 .................................. 13,191,952 12,791,483
Notes receivable ............................................................ 678,114 688,272
Inventories ................................................................. 12,103,114 11,487,463
Prepaid expenses ............................................................ 1,153,206 1,365,027
Deferred income taxes ....................................................... 562,000 1,029,038
------------ ------------
Total current assets ..................................................... 28,684,170 27,601,267
PROPERTY AND EQUIPMENT, NET ....................................................... 3,384,566 2,696,386
DEFERRED INCOME TAXES ............................................................. 1,181,860 1,125,845
INTANGIBLE ASSETS, NET ............................................................ 8,570,920 8,033,978
NOTES RECEIVABLE .................................................................. 1,997,659 2,567,271
OTHER ASSETS ...................................................................... 720,549 1,001,141
------------ ------------
TOTAL ASSETS ...................................................................... $ 44,539,724 $ 43,025,888
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit ............................................................. $ 4,415,000 $ 4,246,452
Current maturities of long term debt ........................................ 1,255,483 1,142,319
Accounts payable ............................................................ 4,101,706 4,902,485
Accrued liabilities ......................................................... 4,103,339 2,958,717
Deferred income taxes ....................................................... 149,730 139,078
------------ ------------
Total current liabilities ................................................ 14,025,258 13,389,051
NOTES PAYABLE ..................................................................... 5,775,286 6,788,219
SUBORDINATED LONG TERM DEBT ....................................................... 6,827,317 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 November 30, 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 November 30, 1998 and February 28, 1998 . 2,655 2,655
Additional paid-in capital .................................................. 8,746,876 8,746,876
Retained earnings ........................................................... 8,497,383 6,736,712
Cost of stock held in treasury .............................................. (57,900) (57,900)
Accumulated other comprehensive income ...................................... (237,000) (131,928)
------------ ------------
$ 17,288,674 $ 15,633,075
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................................ $ 44,539,724 $ 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 NINE MONTHS AND THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
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Net sales .........................................$ 73,128,758 $ 31,441,836 $ 24,106,293 $ 14,053,579
Cost of goods sold ................................ 51,529,234 20,514,673 16,842,804 9,645,801
------------ ------------ ------------ ------------
Gross profit .................................... 21,599,524 10,927,163 7,263,489 4,407,778
Costs and expenses
Shipping ........................................ 5,389,528 2,445,795 1,880,962 1,065,988
General and administrative ...................... 6,179,622 3,002,002 1,978,423 1,142,112
Selling and marketing ........................... 5,910,031 3,094,879 1,952,329 1,213,243
Other expenses .................................. 57,580 4,442 26,548 0
------------ ------------ ------------ ------------
Operating income .................................. 4,062,763 2,380,045 1,425,227 986,435
Interest income ................................... 90,919 191,903 30,767 48,417
Interest expense .................................. (1,317,082) (187,750) (424,342) (159,444)
------------ ------------ ------------ ------------
Income before provision for income taxes .......... 2,836,600 2,384,198 1,031,652 875,408
Provision for income taxes ........................ 1,064,930 932,887 386,028 344,459
------------ ------------ ------------ ------------
NET INCOME ........................................$ 1,771,670 $ 1,451,311 $ 645,624 $ 530,949
============ ============ ============ ============
Basic and diluted net income per common share .....$ 0.66 $ 0.54 $ 0.24 $ 0.20
Weighted average number of shares outstanding ..... 2,689,498 2,677,573 2,659,963 2,702,481
============ ============ ============ ============
</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 NINE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(UNAUDITED)
NINE MONTHS ENDED
------------------------------------
NOVEMBER 30, 1998 NOVEMBER 30, 1997
----------------- -----------------
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Cash flows from operating activities:
Net income ................................................ $ 1,771,670 $ 1,451,311
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of equipment ................................. (91,571) 0
Depreciation and amortization ............................. 980,414 227,184
Bad debt expense .......................................... 145,244 0
Deferred income taxes ..................................... 440,419 127,631
Stock option compensation ................................. 0 51,800
Changes in assets and liabilities, net of acquisitions
Accounts receivable ..................................... (759,713) (113,921)
Inventories ............................................. (656,010) (830,006)
Prepaid expenses ........................................ 191,988 (145,681)
Other assets ............................................ 149,445 (1,430)
Accounts payable and accrued liabilities ................ (286,891) (395,323)
------------ ------------
Net cash provided by operating activities .............. 1,884,995 371,565
------------ ------------
Cash flows from investing activities:
Capital expenditures ...................................... (907,020) (439,236)
Proceeds from sale of fixed assets ........................ 80,734 0
Acquisition, net of cash acquired ......................... 0 (19,297,853)
------------ ------------
Net cash used in investing activities ................... (826,286) (19,737,089)
------------ ------------
Cash flow from financing activities:
Net borrowings under lines of credit .................... 168,548 500,000
Borrowings of long-term debt ............................ 0 14,515,000
Repayments of long-term debt ............................ (1,002,768) (28,745)
Payments on notes receivable ............................ 647,383 30,000
Dividends ............................................... (11,000) 0
------------ ------------
Net cash (used in) provided by financing activities ..... (197,837) 15,016,255
------------ ------------
Translation adjustment ........................................ (105,072) (83,000)
Net increase (decrease) in cash ............................... 755,800 (4,432,269)
Cash and cash equivalents at beginning of period .............. 239,984 4,901,131
------------ ------------
Cash and cash equivalents at end of period .................... $ 995,784 $ 468,862
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ........................................... $ 1,092,000 $ 24,024
Income taxes paid ....................................... $ 100,000 $ 1,062,113
</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 sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles. The results of operations for the nine and three months ended
November 30, 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 Consolidated"), a Delaware corporation and wholly owned subsidiary of
the Seller. Roberts Consolidated is engaged in the manufacture and sale of
carpet installation products, including carpet adhesives and installation tools.
Roberts Consolidated 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.
During the quarter ended November 30, 1998, the Company completed its
allocation of the purchase price of Roberts Consolidated and adjusted various
assets and liabilities to their fair value at the date of acquisition. The
result of this allocation was to increase goodwill by approximately $653,000.
The following unaudited pro forma consolidated results of operations of
the Company assume the acquisitions had occurred March 1, 1997.
Three Months Ended Nine Months Ended
November 30, 1997 November 30, 1997
Sales............................... $ 24,058,768 $ 70,122,982
Net income.......................... $ 140,396 $ 871,704
Net income per common share......... $ .05 $ .33
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
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Note 3. INVENTORIES
The major classes of inventories are as follows:
NOVEMBER 30, 1998 FEBRUARY 28, 1998
Raw materials and work-in-progress..... $ 3,961,763 $ 3,896,608
Finished goods......................... 8,141,351 7,590,855
------------- --------------
$ 12,103,114 $ 11,487,463
============= ==============
Note 4. INTEREST RATE SWAPS
On October 30, 1998, the Company entered into interest rate swap
agreements with its primary lender. Pursuant to the interest rate swap
agreements, the Company, effective December 23, 1998, exchanged its floating
rate interest obligation on an aggregate of $5.5 million in principal at an
average fixed rate of 4.75% per annum for an average maturity of 1.75 years. The
fixing of interest rates reduces in part the Company's exposure to the
uncertainty of floating interest rates. The differentials paid or received on
the interest rate swap agreements are recognized as adjustments to interest
expense in the period incurred.
Note 5. 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 nine months and the three months ended November 30, 1998 and
November 30, 1997, the weighted average number of basic shares of common stock
outstanding amounted to 2,654,894. For the nine months ended November 30, 1998
and November 30, 1997, the weighted average number of diluted shares of common
stock outstanding amounted to 2,689,498 and 2,677,573 respectively. For the
three months ended November 30, 1998 and November 30, 1997, the weighted average
number of diluted shares of common stock outstanding amounted to 2,659,963 and
2,702,481 respectively. In accordance with the provisions of FAS 128, the
Company has retroactively restated earnings per share.
Note 6. 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 nine months ended November 30, 1998
and November 30, 1997, the Company's comprehensive income totaled $1,666,598 and
$1,368,311 respectively. For the three months ended November 30, 1998 and
November 30, 1997, comprehensive income amounted to $683,624 and $447,949
respectively.
Note 7. 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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133") was issued in September 1998 and is effective for
fiscal years beginning after June 15, 1999. This statement requires entities to
recognize all derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies new methods of
accounting for hedging transactions, prescribes the items and transactions that
may be hedged, and specifies detailed criteria to be met to qualify for hedge
accounting. The Company believes that the statement will not have a material
effect on its financial statements when adopted.
Note 8. RECLASSIFICATIONS
Certain amounts in the 1997 presentation have been reclassified to
conform to the 1998 presentation.
7
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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
NINE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED NOVEMBER
30, 1997
Net sales for the nine months ended November 30, 1998 (the "fiscal 1999
period") were approximately $73,129,000 compared to approximately $31,442,000
for the nine months ended November 30, 1997 (the "fiscal 1998 period"), an
increase of $41,687,000 or 132.6%. Approximately $37,900,000 of this increase
was the result of the Company's acquisition of Roberts Consolidated in October
1997 and Roberts Holland B.V. ("Roberts Holland") in January 1998 (collectively
the "fiscal 1998 acquisitions"). Selling prices remained relatively stable from
the fiscal 1998 period to the fiscal 1999 period and the balance of the increase
in net sales was attributable to an increase in the volume of sales to home
center retailers and independent distributors 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 $21,600,000
compared to $10,927,000 for the fiscal 1998 period, an increase of $10,673,000
or 97.7%. As a percentage of net sales, gross profit decreased to 29.5% in the
fiscal 1999 period from 34.8% in the fiscal 1998 period. This decrease was a
result of the fiscal 1998 acquisitions whose products have historically had
lower gross profit margins than the Company's products.
Shipping expenses for the fiscal 1999 period were approximately
$5,390,000 compared to $2,446,000 for the fiscal 1998 period, an increase of
$2,944,000 or 120.4%. As a percentage of net sales, these expenses decreased to
7.4% in the fiscal 1999 period from 7.8% in the fiscal 1998 period.
Approximately $2,496,000 of the increase in shipping expenses was the result of
the Company's fiscal 1998 acquisitions and the balance was attributable to
increased sales of other Company products. Shipping expenses as a percentage of
sales decreased due to freight costs as a percentage of sales being lower at the
fiscal 1998 acquisitions.
General and administrative expenses for the fiscal 1999 period were
approximately $6,180,000 compared with approximately $3,002,000 for the fiscal
1998 period, an increase of $3,178,000 or 105.9%. As a percentage of net sales,
these expenses decreased to 8.5% in the fiscal 1999 period from 9.5% in the
fiscal 1998 period, reflecting the leveraging of these costs over greater sales.
Approximately $2,683,000 of the increase in these expenses was the result of
personnel costs associated with the fiscal 1998 acquisitions. The remainder of
the increase related to costs associated with the hiring of certain key
management personnel and the write-off of certain accounts receivable balances.
8
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Selling and marketing costs for the fiscal 1999 period were
approximately $5,910,000 compared to $3,095,000 for the fiscal 1998 period, an
increase of $2,815,000 or 91.0%. Substantially all of the increase in these
expenses is attributable to the Company's fiscal 1998 acquisitions. As a
percentage of net sales, these expenses decreased to 8.1% in the fiscal 1999
period from 9.8% in the fiscal 1998 period. This percentage decrease resulted
because selling and marketing costs as a percentage of sales were lower for
Roberts Consolidated. The Company's lower selling and marketing costs at Roberts
Consolidated were a result of the small sales force maintained by Roberts
Consolidated prior to its acquisition by the Company.
Interest income for the fiscal 1999 period was approximately $91,000
compared to $192,000 in fiscal 1998. Interest expense for the fiscal 1999 period
was approximately $1,317,000 compared to approximately $188,000 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 fiscal 1998 acquisitions.
Provision for income taxes was approximately $1,065,000 in the fiscal
1999 period compared to approximately $933,000 in the fiscal 1998 period, an
increase of $132,000 or 14.1%. The effective tax rate was approximately 37.5%
for the fiscal 1999 period compared to 39.1% for the fiscal 1998 period. The
change in the effective tax rate reflects the differences in tax rates at the
Company's different subsidiaries, certain of which were acquired by the Company
in the fiscal 1998 period. The effective tax rate for fiscal 1999 is based upon
the most current effective tax rates published.
As a result of the above, net income for the fiscal 1999 period
increased to $1,772,000 from $1,451,000 in the fiscal 1998 period, an increase
of $321,000 or 22.1%. Further, net income as a percentage of net sales decreased
to 2.4% in fiscal 1999 compared to 4.6% in fiscal 1998.
THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1997.
Net sales for the three months ended November 30, 1998 (the "fiscal
1999 period") were approximately $24,106,000 compared to approximately
$14,054,000 for the three months ended November 30 , 1998 (the "fiscal 1998
period"), an increase of $10,052,000 or 71.5%. Of the total increase, $8,570,000
represents sales from the Company's fiscal 1998 acquisitions. The remainder
represents increased volume of sales to home center retailers and independent
distributors due to an increase in market penetration by these customers.
Gross profit for the fiscal 1999 period was approximately $7,263,000
compared to approximately $4,408,000 in the fiscal 1998 period, an increase of
$2,855,000 or 64.8%. As a percentage of net sales, gross profit decreased from
31.4% in fiscal 1998 to 30.1% in fiscal 1999 due to lower gross profits
associated with sales of the fiscal 1998 acquisitions' product lines.
Shipping expenses for the fiscal 1999 period were approximately
$1,881,000 compared to approximately $1,066,000 for the fiscal 1998 period, an
increase of $815,000 or 76.5%. As a percentage of net sales, these expenses
increased slightly to 7.8% in the fiscal 1999 period from 7.6% in the fiscal
1998 period. An increase amounting to $652,000 of the expense was the result of
the fiscal 1998 acquisitions. The remainder of this expense was attributable to
increased sales volume and costs associated with the establishment of a third
home center shipping point at the Company's Missouri facility.
General and administrative expenses for the fiscal 1999 period were
approximately $1,978,000 compared to approximately $1,142,000 for the fiscal
1998 period, an increase of $836,000 or 73.2%. As a percentage of net sales,
general and administrative expenses remained relatively stable at approximately
8.2% of net sales. Of the total increase, approximately $680,000 represents
general and administrative expenses attributable to the Company's fiscal 1998
acquisitions. The remainder of the increase is primarily attributable to costs
associated with the Company's integration of the fiscal 1998 acquisitions'
administrative and operating functions and costs associated with the hiring of
certain key management personnel.
9
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Selling and marketing costs for the fiscal 1999 period were
approximately $1,952,000 compared to approximately $1,213,000 for the fiscal
1998 period, an increase of $739,000 or 60.9%. As a percentage of net sales,
these expenses decreased to 8.1% in the fiscal 1999 period from 8.6% in the
fiscal 1998 period. Substantially all of the increase in selling and marketing
expenses is attributable to the Company's fiscal 1998 acquisitions. The
percentage decrease is a result of lower selling and marketing costs as a
percentage of sales at Roberts Consolidated as compared to the remainder of the
Company.
Interest income for the fiscal 1999 period was approximately $31,000
compared to $48,000 for the fiscal 1998 period. Interest expense for the fiscal
1999 period was approximately $424,000 compared to approximately $159,000 in
fiscal 1998. Interest income was higher in the prior period because the Company
invested its excess cash, which was available prior to the acquisition of
Roberts Consolidated. Interest expense increased as a result of the increase in
borrowings associated with the fiscal 1998 acquisitions.
Provision for income taxes was approximately $386,000 in the fiscal
1999 period compared to approximately $344,000 for the fiscal 1998 period, an
increase of $42,000 or 12.2%. The effective tax rate was approximately 37.4% for
the fiscal 1999 period compared to 39.3% 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 $646,000 compared to approximately $531,000 for the fiscal 1998
period, an increase of $115,000 or 21.7%.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of November 30, 1998 increased from approximately
$14,212,000 at February 28, 1998 to $14,659,000, an increase of $447,000,
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 fiscal 1999 period
was $1,885,000 compared to $372,000 for the comparable fiscal 1998 period. The
increase in cash provided by operating activities was primarily the result of an
increase in income from operations adjusted for non-cash charges for
depreciation and amortization, offset by an increase in accounts receivable,
which was associated with an increase in sales, and an increase in inventory.
Net cash used in investing activities was $826,000 compared to $19,737,000 for
the comparable fiscal 1998 period. The fiscal 1998 amount was primarily due to
the Roberts Consolidated acquisition whereas the fiscal 1999 amount is primarily
due to the purchase of equipment.
For the fiscal 1999 period, cash used in financing activities was
$198,000 which was primarily the result of repayments of long-term debt offset
by collections on notes receivable. Net cash provided by financing activities
was $15,016,000 in the fiscal 1998 period due primarily to the increase in
borrowings used to finance the Roberts Consolidated acquisition.
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 (6.8% at November 30, 1998)
plus 1.25%. 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
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Company's bank credit facility also prohibits the payment of dividends except
with the lender's consent. The Company had $5,358,000 available for future
borrowings at November 30, 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
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. Roberts Holland
had $167,000 available for future borrowings at November 30, 1998. The
borrowings are collateralized by accounts receivable, inventory, machinery and
equipment and a standby letter of credit from the Company's domestic financial
institution.
On October 30, 1998, the Company entered into interest rate swap
agreements with its primary lender. The interest rate swap agreements hedge the
Company's exposure on certain floating rate obligations in the aggregate
principal amount of $5.5 million. The purpose of the interest rate swaps is to
convert the Company's floating rate interest obligations to obligations having
an average fixed rate of 4.75% per annum for an average period of 1.75 years.
The fixing of interest rates reduces in part the Company's exposure to the
uncertainty of floating interest rates. The differentials paid or received by
the Company on the interest rate swap agreements are recognized as adjustments
to interest expense in the period incurred. The Company is exposed to credit
loss in the event of nonperformance by any counterparty to the interest rate
swap agreements. The Company does not anticipate nonperformance by such lender,
and no material loss would be expected from the nonperformance of the lender.
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 1999, 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 has contacted 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. The Company is currently evaluating supplier responses to date and 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
results of operations. This assessment is based upon a preliminary inquiry into
this matter, management may determine that this assessment is incorrect and
there can be no assurance that the final assessment of this matter will not
differ significantly from the preliminary conclusions.
11
<PAGE>
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.
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.
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 November 30, 1998.
13
<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: January 13, 1999 By: /s/ LEWIS GOULD
----------------------------------------
Lewis Gould, Chief Executive Officer
and Director (Principal Executive Officer)
Dated: January 13, 1999 By: /s/ MARC P. APPLEBAUM
----------------------------------------
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
27 Financial Data Schedule *1
*1 Filed electronically pursuant to Item 401 of Regulation S-T.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 995,784
<SECURITIES> 0
<RECEIVABLES> 13,191,952
<ALLOWANCES> (437,000)
<INVENTORY> 12,103,114
<CURRENT-ASSETS> 28,684,170
<PP&E> 3,384,566
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,539,724
<CURRENT-LIABILITIES> 14,025,258
<BONDS> 0
0
336,660
<COMMON> 2,655
<OTHER-SE> 16,949,359
<TOTAL-LIABILITY-AND-EQUITY> 44,539,729
<SALES> 73,128,758
<TOTAL-REVENUES> 73,128,758
<CGS> 51,529,234
<TOTAL-COSTS> 17,536,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,317,082
<INCOME-PRETAX> 2,836,600
<INCOME-TAX> 1,064,930
<INCOME-CONTINUING> 1,771,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,771,670
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
