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, 1999
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 14, 1999: 2,684,894 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
August 31, 1999 (Unaudited) and February 28, 1999
(Audited).............................................. 3
Consolidated Statements of Income (Unaudited)
For the Six and Three Months Ended August 31, 1999
and 1998............................................... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended August 31, 1999 and 1998...... 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............................................... 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings......................................... 14
Item 4 - Submission of Matters to a Vote of Security Holders....... 14
Item 6 - Exhibits and Reports on Form 8-K.......................... 15
Signatures......................................................... 16
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, 1999 AND FEBRUARY 28, 1999
<TABLE>
<CAPTION>
AUGUST 31, 1999 FEBRUARY 28, 1999
--------------- -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 1,380,477 $ 290,066
Accounts receivable, less allowance for
doubtful accounts of $568,000 and $382,000 at
August 31, 1999 and February 28, 1999, respectively..................... 15,509,828 15,223,097
Notes receivable........................................................... 754,867 678,743
Inventories................................................................ 16,368,435 15,156,137
Prepaid expenses........................................................... 496,409 269,609
Deferred Income Taxes...................................................... 684,391 684,391
------------ ------------
Total current assets.................................................... 35,194,407 32,302,043
PROPERTY AND EQUIPMENT, NET...................................................... 3,817,130 3,543,079
DEFERRED INCOME TAXES............................................................ 951,194 1,121,194
INTANGIBLE ASSETS, NET........................................................... 11,070,878 8,767,019
NOTES RECEIVABLE................................................................. 1,388,056 1,843,364
OTHER ASSETS..................................................................... 747,837 674,453
------------ ------------
TOTAL ASSETS .................................................................... $ 53,169,502 $ 48,251,152
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit............................................................ $ 9,350,000 $ 6,084,209
Acquisition notes payable.................................................. 1,571,500 --
Current maturities of long term debt....................................... 1,288,892 1,218,253
Accounts payable........................................................... 5,268,830 6,297,204
Accrued liabilities........................................................ 3,605,598 3,681,368
------------ ------------
Total current liabilities............................................... 21,084,820 17,281,034
NOTES PAYABLE.................................................................... 5,144,481 5,643,945
SUBORDINATED LONG TERM DEBT...................................................... 6,936,394 6,899,390
DEFERRED INCOME TAXES............................................................ 528,387 528,387
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, 1999 and February 28, 1999.. 336,660 336,660
Common stock, 10,000,000 shares authorized, $.001 par value; 2,684,894
and 2,654,894 shares issued and outstanding at August 31, 1999 and
February 28, 1999, respectively......................................... 2,685 2,655
Additional paid-in capital................................................. 8,945,854 8,746,876
Retained earnings.......................................................... 10,615,350 9,147,105
Cost of stock held in treasury............................................. ( 57,900) (57,900)
Accumulated other comprehensive income..................................... (367,229) (277,000)
------------ ------------
$ 19,475,420 $ 17,898,396
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................................... $ 53,169,502 $ 48,251,152
============ ============
</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, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
AUGUST 31, 1999 AUGUST 31, 1998 AUGUST 31, 1999 AUGUST 31, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Sales........................... $ 56,259,238 $ 49,082,384 $ 29,092,177 $ 24,881,238
Cost of goods sold.................. 39,383,205 34,744,347 20,660,778 17,702,008
------------ ------------ ------------ ------------
Gross profit...................... 16,876,033 14,338,037 8,431,399 7,179,230
------------ ------------ ------------ ------------
Costs and expenses
Shipping.......................... 4,306,924 3,508,566 2,179,211 1,783,729
General and administrative........ 4,711,413 4,203,199 2,452,812 2,242,587
Selling and marketing............. 4,629,855 3,957,702 2,207,599 1,991,240
Other expenses.................... 9,926 31,033 18,472 13,262
------------ ------------ ------------ ------------
13,658,118 11,700,500 6,858,094 6,030,818
------------ ------------ ------------ ------------
Operating income.................... 3,217,915 2,637,537 1,573,305 1,148,412
Interest income..................... 56,144 60,152 28,370 28,364
Interest expense.................... (916,466) (892,740) (483,189) (447,616)
------------ ------------ ------------ ------------
Income before provision for income
taxes............................... 2,357,593 1,804,949 1,118,486 729,160
Provision for income taxes.......... 883,163 678,902 416,887 249,615
------------ ------------ ------------ ------------
Net income.......................... $ 1,474,430 $ 1,126,047 $ 701,599 $ 479,545
============ ============ ============ ============
Basic and diluted net income per
common share........................ $0.55 $0.42 $0.26 $0.18
Weighted average number of shares
outstanding......................... 2,687,651 2,704,266 2,690,698 2,705,873
============ ============ ============ ============
</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, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
AUGUST 31, 1999 AUGUST 31, 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 1,474,430 $ 1,126,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of equipment.......................................... --- (79,049)
Depreciation and amortization...................................... 774,720 582,776
Provision for doubtful accounts.................................... 248,601 179,775
Deferred income taxes.............................................. 170,000 440,419
Changes in assets and liabilities, net of acquisitions:
Accounts receivable.............................................. 27,164 (1,949,919)
Inventories...................................................... (166,374) (219,257)
Prepaid expenses................................................. (91,074) 67,192
Other assets..................................................... (67,939) 28,729
Accounts payable and accrued liabilities......................... (1,931,407) 199,222
------------ ------------
Net cash provided by operating activities........................ 438,121 375,935
------------ ------------
Cash flows from investing activities:
Capital expenditures............................................... (287,886) (585,676)
Purchase of trademarks............................................. (833,050) --
Acquisitions, net of cash acquired................................. (1,149,700) --
Proceeds from sale of fixed assets................................. -- 80,734
------------ ------------
Net cash used in investing activities............................ (2,270,636) (504,942)
------------ ------------
Cash flow from financing activities:
Net borrowings under lines of credit............................. 3,265,791 476,820
Repayments of long-term debt..................................... (653,300) (582,671)
Purchase of subordinated debentures.............................. (107,143) ---
Repayment of acquisition notes payable........................... (64,200) ---
Payments received on notes receivable............................ 379,184 414,448
Proceeds from exercise of stock options.......................... 199,008
Dividends........................................................ (6,185) (2,502)
------------ ------------
Net cash provided by financing activities........................ 3,013,155 306,095
------------ ------------
Cumulative currency translation adjustment............................. (90,229) (143,072)
Net increase in cash................................................... 1,090,411 34,016
Cash and cash equivalents at beginning of period....................... 290,066 239,984
------------ ------------
Cash and cash equivalents at end of period............................. $ 1,380,477 $ 274,000
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid.................................................... $ 909,783 $ 390,569
Income taxes paid................................................ $ 937,500 $ 50,000
</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, 1999, of Q.E.P. Co.,
Inc. (the "Company") as filed with the Securities and Exchange Commission. The
February 28, 1999 balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles. The results of operations for the six and three months ended August
31, 1999 are not necessarily indicative of the results for the full fiscal year
ending February 29, 2000.
Note 2. INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1999 FEBRUARY 28, 1999
--------------- -----------------
<S> <C> <C>
Raw materials and work-in-process.................... $ 5,070,043 $ 3,881,685
Finished goods....................................... 11,298,392 11,274,452
-------------- ----------------
$ 16,368,435 $ 15,156,137
============== ================
</TABLE>
Note 3. EARNINGS PER SHARE
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. Diluted earnings per share is computed by dividing net income by the
weighted average number of shares of common and dilutive common stock equivalent
shares outstanding during each period. Diluted common stock equivalent shares
consist of stock options and warrant common stock equivalent shares which are
not used when the effect is antidilutive. For the six months and three months
ended August 31, 1998, the weighted average number of basic shares of common
stock outstanding amounted to 2,654,894. For the six months and the three months
ended August 31, 1999, the weighted average number of basic shares of common
stock outstanding amounted to 2,668,227 and 2,678,227, respectively. For the six
months ended August 31, 1999 and August 31, 1998, the weighted average number of
diluted shares of common stock outstanding amounted to 2,687,651 and 2,704,266,
respectively. For the three months ended August 31, 1999 and August 31, 1998,
the weighted average number of diluted shares of common stock outstanding
amounted to 2,690,698 and 2,705,873, respectively.
6
<PAGE>
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. COMPREHENSIVE INCOME
Comprehensive income includes foreign currency translation adjustments
and, for the six months ended August 31, 1999 and 1998, the Company's
comprehensive income totaled $1,380,201 and $982,974, respectively. For the
three months ended August 31, 1999 and 1998, the Company's comprehensive income
totaled $642,266 and $300,545, respectively.
Note 5. FUTURE EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133 "Accounting of Derivative Instruments and
Hedging Activities" was issued. This standard establishes new accounting and
reporting standards requiring that every derivative financial instrument be
recorded in the balance sheet as either assets or liabilities and measured at
fair value. SFAS 133 requires that changes in the derivative's fair value should
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allow a derivative's gains and
losses to offset related results on the hedge item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accurately.
SFAS 133 is effective for fiscal years beginning after June 15, 2000.
The effect of adopting the Standard is currently being evaluated but is
not expected to have a material effect on the Company's financial position or
results of operations.
Note 6. RECLASSIFICATIONS
Certain amounts in the 1998 presentation have been reclassified to
conform to the 1999 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 specialty tools and related
products used primarily for surface preparation and installation of ceramic
tile, carpet, marble and drywall. The Company's products are sold to home
improvement retailers, specialty distributors, original equipment manufacturers
and chain or independent hardware, tile and carpet 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 contains forward-looking statements which are made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Statements as to what the Company "believes," "intends," "expects" or
"anticipates" and other similarly anticipatory expressions, are generally
forward-looking and are made only as of the date of this report. Additionally,
the statements 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 ability to satisfy its working capital needs and to finance its
anticipated capital expenditures, the Company's assessment of the effect of any
non-performance by the lender under the interest rate swap agreements, the
Company's dependence upon a limited number of customers for a substantial
portion of its sales, the Company's reliance upon suppliers and sales agents for
the purchase of finished products which are then resold by it, the Company's
dependence upon certain key personnel, its ability to manage its growth and the
risk of economic and market factors affecting the Company or its customers and
other risks and uncertainties described elsewhere herein.
RESULTS OF OPERATIONS
SIX MONTHS ENDED AUGUST 31, 1999 COMPARED TO SIX MONTHS ENDED
AUGUST 31, 1998
Net sales for the six months ended August 31, 1999 (the
"fiscal 2000 period") were approximately $56,259,000 compared to approximately
$49,082,000 for the six months ended August 31, 1998 (the "fiscal 1999 period"),
an increase of $7,177,000 or 14.6%. Although selling prices remained relatively
stable, there was an increase in the volume of sales to substantially all of the
Company's customer groups, especially home center retailers. The home center
retailers continued to increase market penetration by new store openings and
expanded certain product lines offered by the Company.
Gross profit for the fiscal 2000 period was approximately
$16,876,000 compared to $14,338,000 for the fiscal 1999 period, an increase of
$2,538,000 or 17.7%. As a percentage of net sales, gross profit increased to
30.0% in the fiscal 2000 period from 29.2% in the fiscal 1999 period. This
increase was primarily the result of a change in product mix towards higher
margin products.
Shipping expenses for the fiscal 2000 period were
approximately $4,307,000 compared to $3,509,000 for the fiscal 1999 period, an
increase of $798,000 or 22.7%. As a percentage of net sales, these expenses
increased to 7.7% in the fiscal 2000 period from 7.2% in the fiscal 1999 period
primarily as a result of an increase in freight rates charged by common
carriers. Such rate increase and the higher sales volume substantially accounted
for the actual increase in shipping expenses.
8
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General and administrative expenses for the fiscal 2000 period
were approximately $4,711,000 compared with approximately $4,203,000 for the
fiscal 1999 period, an increase of $508,000 or 12.1%. As a percentage of net
sales, these expenses decreased to 8.4% in the fiscal 2000 period from 8.6% in
the fiscal 1999 period, reflecting the leveraging of these costs over greater
sales. The actual increase was primarily the result of costs associated with the
addition of certain key personnel.
Selling and marketing costs for the fiscal 2000 period were
approximately $4,630,000 compared to $3,958,000 for the fiscal 1999 period, an
increase of $672,000 or 17.0%. As a percentage of net sales, these expenses
remained relatively stable at 8.2%. The actual increase relates primarily to
advertising allowances and commissions associated with the increase in sales
volume.
Interest income for the fiscal 2000 period was approximately
$56,000 compared to $60,000 in fiscal 1999. Interest expense for the fiscal 2000
period was approximately $916,000 compared to approximately $893,000 in fiscal
1999. Interest expense increased as a result of an increase in borrowings under
the Company's line of credit facilities and related interest rates offset in
part by a reduction of long term debt.
Provision for income taxes was approximately $883,000 in the
fiscal 2000 period compared to approximately $679,000 in the fiscal 1999 period,
an increase of $204,000 or 30.0%. The effective tax rate was approximately 37.5%
for the fiscal 2000 and 1999 periods. The estimated tax rate is based upon the
most recent effective tax rates available.
As a result of the above, net income for the fiscal 2000
period increased to $1,474,000 from $1,126,000 in the fiscal 1999 period, an
increase of $348,000 or 30.9%. Net income as a percentage of net sales increased
to 2.6% in fiscal 2000 compared to 2.3% in fiscal 1999.
THREE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS
ENDED AUGUST 31, 1998.
Net sales for the three months ended August 31, 1999 were
approximately $29,092,000 compared to approximately $24,881,000 for the three
months ended August 31, 1998, an increase of $4,211,000 or 16.9%. As selling
prices remained stable, a substantial amount of the increase in sales volume was
attributable to the Company's home center customers as they continued to
increase market penetration through new store openings and the expansion of
certain product lines offered by the Company.
Gross profit for the fiscal 2000 period was approximately
$8,431,000 compared to approximately $7,179,000 in the fiscal 1999 period, an
increase of $1,252,000 or 17.4%. As a percentage of net sales, gross profit
increased slightly from 28.9% in fiscal 1999 to 29.0% in fiscal 2000 due to a
change in product mix towards higher margin products.
Shipping expenses for the fiscal 2000 period were
approximately $2,179,000 compared to approximately $1,784,000 for the fiscal
1999 period, an increase of $395,000 or 22.1%. As a percentage of net sales,
these expenses increased to 7.5% in the fiscal 2000 period from 7.2% in the
fiscal 1999 period primarily due to an increase in freight rates. The actual
increase was primarily the result of the aforementioned increase in freight
rates and increased sales volume.
General and administrative expenses for the fiscal 2000 period
were approximately $2,453,000 compared to approximately $2,243,000 for the
fiscal 1999 period, an increase of $210,000 or 9.4%. As a percentage of net
sales, general and administrative expenses decreased from 9.0% in fiscal
9
<PAGE>
1999 to 8.4% in fiscal 2000, reflecting the leveraging of these costs over
greater sales. The actual increase was primarily the result of employee related
costs and expenses.
Selling and marketing costs for the fiscal 2000 period were
approximately $2,208,000 compared to approximately $1,991,000 for the fiscal
1999 period, an increase of $217,000 or 10.9%. As a percentage of net sales,
these expenses decreased to 7.6% in the fiscal 2000 period from 8.0% in the
fiscal 1999 period. This decrease is as a result of lower fixed costs being
slightly offset by increased commissions due to the higher sales volume.
Interest income for the fiscal 2000 and fiscal 1999 periods
was approximately $28,000. Interest expense for the fiscal 2000 period was
approximately $483,000 compared to approximately $448,000 in fiscal 1999.
Interest expense increased as a result of the increase in borrowings under the
Company's line of credit facilities associated with the Company's acquisition of
certain foreign businesses and an increase in interest rates.
Provision for income taxes was approximately $417,000 in the
fiscal 2000 period compared to approximately $250,000 for the fiscal 1999
period, an increase of $167,000 or 66.8%. The effective tax rate was
approximately 37.3% for the fiscal 2000 period compared to 34.3% for the fiscal
1999 period. The estimated tax rate is based upon the most recent tax rates
available.
As a result of the above, net income for the fiscal 2000
period was approximately $702,000 compared to approximately $480,000 for the
fiscal 1999 period, an increase of $222,000 or 46.3%.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of August 31, 1999 decreased from
approximately $15,021,000 at February 28, 1999 to $14,110,000, a decrease of
$911,000, primarily as a result of the Company's increase in operations offset
by an increase in short term borrowings to fund the acquisition of certain
foreign businesses. 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, 1999 was $438,000 compared to $376,000 for the
comparable period in fiscal 1999. The increase in cash provided by operating
activities was primarily as a result of an increase in income from operations.
Net cash used in investing activities was $2,271,000 compared to $505,000 for
the comparable period in fiscal 1999, primarily due to the acquisition of
certain foreign businesses.
Net cash provided by financing activities was $3,013,000
compared to $306,000 in the comparable period in fiscal 1999 due primarily to an
increase in short term borrowings to fund working capital needs and the foreign
acquisitions, offset by repayments made on the Company's term loan.
The Company has a revolving credit and term loan facility
agreement with a financial institution. This agreement provides for a
$10,000,000 domestic facility and borrowings of up to $5,000,000 for the
Company's foreign subsidiaries. These facilities permit borrowings against a
fixed percentage of eligible accounts receivable and inventory as defined.
Interest is payable at LIBOR plus 1.25% (5.32% at August 31, 1999) or an
alternative currency rate plus 1.25%. The domestic revolving credit agreement
terminates July 2003 while the foreign facility terminates June 2001. The credit
facility is
10
<PAGE>
collateralized by accounts receivable, inventory, equipment and certain real
property. Under the terms of the agreement, the Company is required to maintain
certain financial ratios and 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. At August 31, 1999, the
Company had $4,058,000 available for future borrowings under the domestic credit
facility and $1,500,000 under its foreign credit facility. Prior to the
establishment of the foreign credit facility as described above, the Company had
a short-term credit line with a European financial institution utilized by
Roberts Holland B.V. This facility was repaid with the proceeds of the new
credit facility. In connection with the acquisition of Roberts Consolidated
Industries, Inc., 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. At August
31, 1999 and February 28, 1999, the amortized balance of this obligation was
$6,936,394 and $6,899,390, respectively.
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. For the six and three months ended
August 31, 1999, the Company reduced interest expense by approximately $10,000
and $3,000, respectively as a result of the interest rate swap agreements. The
Company is exposed to credit loss in the event of nonperformance by any
counter-party to the interest rate swap agreements. The Company does not
anticipate nonperformance by such lender, and no material loss would be expected
from the non-performance 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 will be
adequate 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 and its foreign systems during the first quarter of
fiscal 2000 which, among other things, ensure 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
replacement of certain analog systems in connection with certain recently
acquired subsidiaries. The Company does not expect the costs associated with
the replacement of these analog systems to have a material effect on its
financial position or results of operations. All costs for such corrective
actions will be funded with cash flow generated from operations and expensed
as incurred.
11
<PAGE>
RISKS OF YEAR 2000 ISSUES
The Company participates in the electronic data interchange
program maintained by many of its larger customers, including Home Depot, Lowe's
and HomeBase. The Company's principal customers have provided written
notification advising the Company that they are in the process of, or have been,
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. 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.
The costs associated with Year 2000 compliance of the
Company's recently acquired subsidiaries' analog systems 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. Because of these
inherent uncertainties the Company is unable to quantify its potential exposure
with certainty.
CONTINGENCY PLANS
As further described above, the Company believes that its
principal risks related to the Year 2000 are (i) the level of preparedness of
its suppliers and customers and (ii) the analog systems of certain of the
Company's recently acquired foreign subsidiaries. In an attempt to mitigate
these risks, the Company will develop contingency plans for any unplanned
interruptions arising from the date change as well as from the failure of any
third party's compliance. Such plans may include a build up of inventory before
the end of the calendar year and the manual processing of certain customer
orders and invoices.
12
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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. For the six and three months ended
August 31, 1999, the Company reduced interest expense by approximately $10,000
and $3,000, respectively as a result of the interest rate swap agreements. The
Company is exposed to credit loss in the event of non-performance by any
counter-party to the interest rate swap agreements. The Company does not
anticipate nonperformance by such lender, and no material loss would be expected
from the non-performance of the lender.
The Company averaged approximately $8,865,000 and $9,695,000
of debt not covered by the interest rate swap agreements during the six and
three months ended August 31, 1999. If interest rates would have increased by
10%, the effect on the Company would have been an increase in interest expense
of approximately $37,000 and $20,000, respectively.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is periodically involved in litigation from time to time in
the 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on July 16,
1999. 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: 2,553,919 votes withheld: 3,490
Leonard Gould votes for: 2,553,919 votes withheld: 3,490
Lewis Gould votes for: 2,553,919 votes withheld: 3,490
Christian Nast votes for: 2,553,919 votes withheld: 3,490
Emil Vogel votes for: 2,553,919 votes withheld: 3,490
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 the fiscal year ending
February 29, 2000.
For: 2,555,619
Against: 1,090
Abstain: 700
There were no broker non-votes on this proposal.
14
<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**
10.3.3 Second Agreement of Amendment to the Amended and Restated Loan
Agreement by and among Q.E.P. Co., Inc., Q.E.P.-O'Tool, Inc.,
Marion Tool Corporation, Westpoint Foundry, Inc., Roberts
Consolidated Industries, Inc., Roberts Holding International,
Inc., and Roberts Company Canada Limited and Fleet National
Bank dated as of October 21, 1997****
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.
**** Incorporated by reference to Exhibit of the same number filed with the
Company's quarterly report for the period ended May 31, 1999 on Form
10Q filed on July 14, 1999.
(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, 1999.
15
<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 14, 1999 By: /s/ LEWIS GOULD
-------------------------------------------------
Lewis Gould, Chairman, Chief Executive Officer
and Director (Principal Executive Officer)
Dated: October 14, 1999 By: /s/ MARC P. APPLEBAUM
-------------------------------------------------
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<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> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 1,380,477
<SECURITIES> 0
<RECEIVABLES> 15,509,828
<ALLOWANCES> (568,287)
<INVENTORY> 16,368,435
<CURRENT-ASSETS> 35,194,407
<PP&E> 11,937,204
<DEPRECIATION> (8,120,074)
<TOTAL-ASSETS> 53,169,502
<CURRENT-LIABILITIES> 21,084,820
<BONDS> 0
0
336,660
<COMMON> 2,685
<OTHER-SE> 19,136,075
<TOTAL-LIABILITY-AND-EQUITY> 53,169,502
<SALES> 56,259,238
<TOTAL-REVENUES> 56,259,238
<CGS> 39,383,205
<TOTAL-COSTS> 13,658,118
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (860,322)
<INCOME-PRETAX> 2,357,593
<INCOME-TAX> (883,163)
<INCOME-CONTINUING> 1,474,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,474,430
<EPS-BASIC> .55
<EPS-DILUTED> .55
</TABLE>
