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: May 31, 2000
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 the 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 twelve 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 July 12, 2000: 2,664,894 shares of common stock, par value
$0.001 per share.
1
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Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
May 31, 2000 (Unaudited) and February 29, 2000 (Audited)................................3
Consolidated Statements of Income (Unaudited)
For the Three Months Ended May 31, 2000 and 1999........................................4
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended May 31, 2000 and 1999........................................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 6 - Exhibits and Reports on Form 8-K..............................................................13
Signatures.............................................................................................14
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2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
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<CAPTION>
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2000 AND FEBRUARY 29, 2000
May 31, 2000 February 29, 2000
------------ -----------------
(UNAUDITED) (AUDITED)
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ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................ $ 605,798 $ 829,063
Accounts receivable, less allowance for doubtful accounts
of approximately $659,000 and $741,000 as of May 31, 2000
and February 29, 2000, respectively ................................ 16,866,700 16,176,540
Notes receivable ..................................................... 1,479,468 1,681,210
Inventories .......................................................... 18,358,660 17,588,885
Prepaid expenses ..................................................... 823,902 972,992
Deferred income taxes ................................................ 564,472 752,630
------------ ------------
Total current assets ............................................... 38,699,000 38,001,320
Property and Equipment, net ............................................... 4,577,695 4,329,695
Deferred income taxes ..................................................... 1,271,445 1,271,445
Intangible assets, net .................................................... 13,868,482 13,251,699
Notes receivable .......................................................... 50,120 42,339
Other assets .............................................................. 846,491 818,215
------------ ------------
Total Assets .............................................................. $ 59,313,233 $ 57,714,713
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit ...................................................... $ 9,910,826 $ 10,414,746
Current maturities of long term debt ................................. 1,337,137 1,470,092
Acquisition notes payable ............................................ 1,872,500 1,872,500
Accounts payable ..................................................... 8,033,434 6,452,570
Accrued liabilities .................................................. 4,036,236 4,280,901
------------ ------------
Total current liabilities .......................................... 25,190,133 24,490,809
Notes payable ............................................................. 4,454,237 4,584,076
Acquisition notes payable ................................................. 1,112,500 1,112,500
Subordinated long term debt ............................................... 5,945,301 5,891,126
Deferred income taxes ..................................................... 453,286 453,286
Commitments and contingencies ............................................. -- --
SHAREHOLDERS' EQUITY
Preferred stock, 2,500,000 shares authorized, $1.00 par value; 336,660
shares issued and outstanding at May 31, 2000 and February 29, 2000 336,660 336,660
Common stock, 10,000,000 shares authorized, $.001 par value;
3,366,118 and 3,356,118 shares issued and outstanding at ........... 3,366 3,356
May 31, 2000 and February 29, 2000, respectively
Additional paid-in capital ........................................... 8,998,722 8,945,390
Retained earnings .................................................. 13,275,153 12,338,285
Cost of stock held in treasury ..................................... (57,900) (57,900)
Accumulated other comprehensive income ............................. (398,225) (382,875)
------------ ------------
$ 22,157,776 $ 21,182,916
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................ $ 59,313,233 $ 57,714,713
============ ============
The accompanying notes are an integral part of these statements.
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Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MAY 31, 2000 AND 1999
(UNAUDITED)
Three Months Ended
May 31, 2000 May 31, 1999
------------ ------------
Net Sales ...................................... $ 31,560,138 $ 27,167,061
Cost of goods sold ............................. 21,755,623 18,722,427
------------ ------------
Gross profit ................................ 9,804,515 8,444,634
------------ ------------
Costs and expenses
Shipping .................................... 2,328,542 2,127,713
General and administrative .................. 2,701,421 2,258,601
Selling and marketing ....................... 2,782,993 2,422,256
Other expense (income) ...................... 25,656 (8,546)
------------ ------------
7,838,612 6,800,024
------------ ------------
Operating income ............................ 1,965,903 1,644,610
Interest income ................................ 32,125 27,774
Interest expense ............................... (474,842) (433,277)
------------ ------------
Income before provision for income taxes ....... 1,523,186 1,239,107
Provision for income taxes ..................... (580,341) (466,276)
------------ ------------
Net income ..................................... $ 942,845 $ 772,831
============ ============
Basic and diluted earnings per common share..... $ 0.28 $ 0.23
The accompanying notes are an integral part of these statements.
4
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<CAPTION>
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 2000 AND 1999
(UNAUDITED)
Three Months Ended
May 31, 2000 May 31, 1999
------------ ------------
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Cash flows from operating activities:
Net income ................................................ $ 942,845 $ 772,831
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................. 475,117 330,136
Deferred income taxes ..................................... 188,158 --
Bad debt expense .......................................... 103,728 93,995
Changes in assets and liabilities, net of acquisitions:
Accounts receivable ..................................... (714,009) 5,438
Inventories ............................................. (735,804) (2,201,401)
Other current assets .................................... 149,090 (244,398)
Other assets ............................................ (448,547) (80,005)
Accounts payable and accrued liabilities ................ 1,260,489 (414,237)
----------- -----------
Net cash provided by (used in) operating activities ..... 1,221,067 (1,737,641)
----------- -----------
Cash flows from investing activities
Capital expenditures ...................................... (142,602) (117,151)
Acquisitions, net of cash acquired ........................ (437,065) --
Purchase of license agreement ............................. (200,000) --
----------- -----------
Net cash used in investing activities ........................ (779,667) (117,151)
----------- -----------
Cash flows from financing activities:
Net (repayment) borrowing under lines of credit ........... (503,920) 1,993,791
Repayments of long-term debt .............................. (386,720) (333,605)
Payments received on notes receivable ..................... 193,960 189,967
Proceeds from exercise of stock options ................... 53,550 63,750
Dividends ................................................. (6,185) (6,185)
----------- -----------
Net cash (used in) provided by financing activities ....... (649,315) 1,907,718
----------- -----------
Cumulative currency translation adjustment ................... (15,350) (34,896)
----------- -----------
Net (decrease) increase in cash .............................. (223,265) 18,030
Cash and cash equivalents at beginning of period ............. 829,063 290,066
----------- -----------
Cash and cash equivalents at end of period ................... $ 605,798 $ 308,096
=========== ===========
Supplemental disclosure of cash flow information
Interest paid ............................................. $ 553,811 $ 498,374
Income taxes paid ......................................... $ 403,550 $ 652,500
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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 29, 2000, of Q.E.P. Co.,
Inc. (the "Company") as filed with the Securities and Exchange Commission. The
February 29, 2000 balance sheet was derived from audited financial statements,
but does not include all disclosures required by accounting principles generally
accepted in the United States. The results of operations for the three months
ended May 31, 2000 are not necessarily indicative of the results for the full
fiscal year ending February 28, 2001.
Note 2. Inventories
The major classes of inventories are as follows:
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<CAPTION>
May 31, 2000 February 29, 2000
------------ -----------------
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Raw materials and work-in process............ $ 4,820,623 $ 4,576,530
Finished goods............................... 13,538,037 13,012,335
------------ ------------
$ 18,358,660 $ 17,588,885
============ ============
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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, after
deducting preferred stock dividends accumulated during the period, by the
weighted average number of shares of common and dilutive common stock equivalent
shares outstanding during the period. Diluted common stock equivalent shares
consist of stock options and warrant common stock equivalent shares which are
not utilized when the effect is antidilutive.
For the three months ended May 31, 2000 and 1999 and as adjusted for
the stock split (see Note 4.), the weighted average number of basic shares of
common stock outstanding amounted to 3,360,118 and 3,331,118, respectively. For
the three months ended May 31, 2000 and 1999, the weighted average number of
diluted shares of common stock outstanding amounted to 3,388,067 and 3,355,755,
respectively.
Note 4. Equity
On June 6, 2000, the Board of Directors declared a five for four stock
split of the Company's common stock, effected in the form of a stock dividend to
be paid on August 1, 2000. As a result of this action, approximately 673,000
shares will be issued to shareholders of record on July 17, 2000. Par value of
the common stock remains at $0.001 per share and accordingly, $673 was
transferred from additional paid in capital to common stock.
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The effect on earnings per share was a reduction of $0.07 and $0.06 per share
for the three months ended May 31, 2000 and 1999, respectively. All references
to the number of common shares and per common share amounts have been restated
to give retroactive effect to the stock split for all periods presented.
Note 5. Comprehensive Income
The Company records comprehensive income in accordance with Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS 130
requires foreign currency translation adjustments to be included in other
comprehensive income. During the first quarter of fiscal 2001 and fiscal 2000,
the Company's comprehensive income totaled $927,495 and $737,935, respectively.
Note 6. License Agreement
Effective May 15, 2000, the Company entered into an agreement to
license the distribution rights of tackless carpet strip to U.S. flooring
products distributors. Under the terms of the agreement, the Company will
receive $2,750,000 at a predetermined rate based on cartons of tackstrip sold.
The Company is guaranteed a minimum of $400,000 per year. In addition, the
Company will continue to sell tackless carpet strip to the Home Center and
International markets. For the three months ended May 31, 2000 and 1999, the
Company sold approximately $3,019,000 and $3,430,000, respectively of tackless
carpet strip to U.S. flooring products distributors.
Note 7. Non - cash Investing and Financing Activities
During the three months ended May 31, 2000, the Company made two
strategic acquisitions. In connection with the acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $512,774
Cash paid 437,065
--------
Liabilities assumed $ 75,709
========
Issuance of notes to related sellers $106,249
========
Note 8. 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.
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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 flooring related products for the home
improvement market. The Company markets over 4,000 specialty tools and flooring
related products used primarily for surface preparation and installation of
ceramic tile, carpet, and marble. 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.
From June 1999 through March 2000, the Company made several
acquisitions as part of its strategic plan to enhance its leadership in the
worldwide flooring market. These acquired entities are referred to as the
"Fiscal acquisitions" elsewhere herein.
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 Company is 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 the assumptions upon which
the Company bases its assessment of its future working capital and capital
expenditure requirements and those relating to the Company's ability to satisfy
its working capital needs and to finance its anticipated capital expenditures,
which could prove to be different than expected, 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 level of demand for the Company's
products among existing and potential new customers, the Company's ability to
successfully manage and integrate the business and operations of acquired
entities, the Company's dependence upon certain key personnel and its ability to
successfully integrate new management personnel into the Company, its ability to
manage its growth, the risk of economic and market factors affecting the Company
or its customers and other risks and uncertainties described elsewhere herein.
Results of Operations
Three months ended May 31, 2000 compared to three months ended May 31,
1999
Net sales for the three months ended May 31, 2000 (the "fiscal 2001
period") were approximately $31,560,000, compared to $27,167,000 for the three
months ended May 31, 1999 (the "fiscal 2000 period"), an increase of $4,393,000
or 16.2%. Selling prices increased slightly for one of the Company's product
lines; additionally, there was a substantial increase in the volume of sales to
home center retailers, principally as a result of new store openings and new
product introduction. Further, the Fiscal acquisitions accounted for
approximately $2,150,000 of the increase in sales volume.
Gross profit for the fiscal 2001 period was approximately $9,805,000,
compared to $8,445,000 for the fiscal 2000 period, an increase of $1,360,000 or
16.1%. As a percentage of net sales, gross profit remained constant at 31.1% in
the fiscal 2001 and 2000 periods. A slight increase in the gross margin
resulting from slightly higher selling prices and a change in product mix to
higher margin products was offset by increased raw material prices.
8
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Shipping expenses for the fiscal 2001 period were approximately
$2,329,000, compared to $2,128,000 for the fiscal 2000 period, an increase of
$201,000 or 9.4%. As a percentage of net sales, these expenses decreased to 7.4%
in the fiscal 2001 period from 7.8% in the fiscal 2000 period principally as a
result of the Fiscal 2000 acquisitions whose costs as a percentage of sales are
lower. The actual increase is a result of the higher sales volume and
approximately $105,000 incurred by the Fiscal acquisitions offset by a reduction
in the freight rates charged by common carriers.
General and administrative expenses for the fiscal 2001 period were
approximately $2,701,000, compared with $2,259,000 for the fiscal 2000 period,
an increase of $442,000 or 19.6%. As a percentage of net sales, these expenses
increased to 8.6% in the fiscal 2001 period from 8.3% in the fiscal 2000 period
principally due to the Fiscal 2000 acquisitions having higher costs as a
percentage of sales. The actual increase was primarily the result of the
addition of key management personnel, domestically, and approximately $335,000
being attributable to the Fiscal acquisitions.
Selling and marketing costs for the fiscal 2001 period were
approximately $2,783,000, compared to $2,422,000 for the fiscal 2000 period, an
increase of $361,000 or 14.9%. As a percentage of net sales, these expenses
decreased to 8.8% in the fiscal 2001 period from 8.9% in the fiscal 2000 period.
The actual increase was primarily due to increased commissions resulting from
the higher sales volume and approximately $194,000 of this increase was incurred
by the Fiscal acquisitions.
Interest income increased $4,000 and interest expense increased
$42,000, respectively during the fiscal 2001 period compared to the fiscal 2000
period. The increase in interest expense was a result of the increase in the
borrowing rate associated with short-term financing.
Provision for income taxes was approximately $580,000 in the fiscal
2001 period, compared to $466,000 in the fiscal 2000 period, an increase of
$114,000 or 24.5%. The estimated effective tax rate was approximately 38.1% for
the fiscal 2001 period compared to 37.6% for the fiscal 2000 period. The
estimated effective tax rate is based upon the most recent effective tax rates
available and is higher in fiscal 2001 primarily due to the Fiscal acquisitions.
Net income for the fiscal 2001 period increased to $943,000 from
$773,000 in the fiscal 2000 period, an increase of $170,000 or 22.0%. Net income
as a percentage of net sales increased to 3.0% in fiscal 2001 compared to 2.8%
in fiscal 2000, primarily for the reasons discussed above.
Liquidity and Capital Resources
Working capital as of May 31, 2000 decreased to approximately
$13,509,000 from approximately $13,511,000 at February 29, 2000, a decrease of
$2,000, primarily as a result of the increase in the Company's operations and an
increase in accounts receivable and inventory, associated with the higher sales
volume, offset by acquisition expenses and an increase in accounts payable. 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 2001
period was $1,221,000 compared to a use of cash of $1,738,000 during the fiscal
2000 period. The change was primarily due to an increase in the Company's
operations and an increase in accounts payable. Net cash used in investing
activities was $780,000 in the fiscal 2001 period compared to $117,000 for the
fiscal 2000 period. The increase was primarily due to expenses associated with
acquisitions.
9
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Net cash used by financing activities was $649,000 during the fiscal
2001 period compared to cash provided of $1,908,000 in the fiscal 2000 period
due primarily to repayments of lines of credit and long term debt offset by
collections on notes receivable.
The Company has a revolving credit and term loan facility agreement
with a United States financial institution. This agreement provides for
borrowings of up to $10,000,000 for domestic purposes and borrowings of up to
$5,000,000 for the Company's foreign subsidiaries. The facility permits
borrowings against a fixed percentage of eligible accounts receivable and
inventory. Interest is payable at LIBOR (6.61% at May 31, 2000) plus 1.25% or an
alternative currency rate plus 1.25%. The revolving credit agreement terminates
in July 2003 with respect to the domestic borrowings and in June 2001 with
respect to the foreign borrowings. The credit facility is collateralized by
accounts receivable, inventory and equipment. Under the terms of the credit
agreement, the Company is required to maintain certain financial ratios and
conditions. The credit 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 credit facility also prohibit the payment of dividends, except with
the lender's consent. At May 31, 2000, the Company had $3,285,533 available for
future domestic borrowings, net of $160,000 in outstanding letters of credit,
and $1,750,600 available for future foreign borrowings. The Company's Chilean
subsidiary has two revolving credit facility agreements with a financial
institution which permit borrowings of up to an aggregate of $115,000 with
interest at 18% per year. One of the facilities, which permit borrowings of up
to $95,000, is secured by a standby letter of credit given by the Company. The
facilities expire on August 31, 2000 and October 31, 2000, respectively. At May
31, 2000, the Chilean subsidiary had approximately $27,000 available for future
borrowings under the credit facilities. 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. During the third quarter of fiscal 2000, the Company repurchased
approximately $1,229,000 of its debentures at a discount resulting in an
extraordinary gain from early extinguishment of debt of approximately $181,000
in fiscal 2000. At May 31, 2000 and February 29, 2000, the remaining amortized
balance of this obligation was $5,945,000 and $5,891,000, respectively. In
connection with the Fiscal acquisitions, the Company issued four notes to the
respective sellers. Two of the notes, aggregating approximately $1,260,000, are
payable within one year and are non-interest bearing. The third note, having an
original principal balance of $900,000, is payable in equal installments over a
three year period with interest at the Company's prevailing borrowing rate. The
fourth note, in the principal amount of $825,000, is payable in three
installments of $312,500 in December 2000 and 2001 and $200,000 in December 2003
with interest fixed at $12,500, $12,500 and $25,000, respectively.
On October 30, 1998, the Company entered into two 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. During the fiscal 2001 period, the
Company reduced interest expense by approximately $15,000 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
first interest rate swap agreement in the amount of $1,500,000 expired on
December 23, 1999. The second interest rate swap agreement in the amount of
$4,000,000 expires in December 2000.
10
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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 and debt obligations for the next
twelve months. There can be no assurance, however, that the assumptions upon
which the Company bases its future working capital and capital expenditure
requirements and the assumptions upon which it bases that funds will be
available to satisfy such requirements will prove to be correct. If these
assumptions are not correct, the Company's assessment of its liquidity position
could prove to be incorrect.
11
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES FROM MARKET RISK
On October 30, 1998, the Company entered into two 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. During the fiscal 2001 period, the
Company reduced interest expense by approximately $15,000 as a result of the
interest rate swap agreements. The Company is exposed to credit loss in the
event of non-performance 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
first interest rate swap agreement in the amount of $1,500,000 expired on
December 23, 1999. The second interest rate swap agreement in the amount of
$4,000,000 expires in December 2000.
The Company averaged approximately $12,474,000 of variable rate debt
not covered by the interest rate swap agreements during the quarter ended May
31, 2000. If interest rates would have increased by 10%, the effect on the
Company would have been an increase in interest expense of approximately
$21,000.
12
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is 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 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of the Company*
3.2 By-Laws of the Company**
4.1 Specimen Common Stock Certificate*
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 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 8, 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 May 31, 2000.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Q.E.P. CO., INC.
Dated: July 12, 2000 By: /S/ LEWIS GOULD
-----------------------------------------
Chairman, Chief Executive Officer and
Director
(Principal Executive Officer)
Dated: July 12, 2000 By: /S/ MARC APPLEBAUM
-----------------------------------------
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
27 Financial Data Schedule *1
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*1 Filed electronically pursuant to Item 401 of Regulation S-T.
15
