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, 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 January 13, 2000: 2,684,894 shares of common stock, par value
$.001 per share.
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Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
November 30, 1999 (Unaudited) and February 28, 1999 (Audited)............................. 3
Consolidated Statements of Income (Unaudited)
For the Nine and Three Months Ended November 30, 1999 and 1998............................ 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended November 30, 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 6 - Exhibits and Reports on Form 8-K............................................................. 14
Signatures............................................................................................ 15
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1999 AND FEBRUARY 28, 1999
<TABLE>
<CAPTION>
NOVEMBER 30, 1999 FEBRUARY 28, 1999
----------------- -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................ $ 721,308 $ 290,066
Accounts receivable, less allowance for
doubtful accounts of $655,000 and $382,000 at
November 30, 1999 and February 28, 1999, respectively ................. 15,560,822 15,223,097
Notes receivable ......................................................... 761,554 678,743
Inventories .............................................................. 16,346,083 15,156,137
Prepaid expenses ......................................................... 465,922 269,609
Deferred income taxes .................................................... 684,391 684,391
------------ ------------
Total current assets .................................................. 34,540,080 32,302,043
Property and equipment, net .................................................... 3,893,701 3,543,079
Deferred income taxes .......................................................... 607,901 1,121,194
Intangible assets, net ......................................................... 12,180,353 8,767,019
Notes receivable ............................................................... 1,178,660 1,843,364
Other assets ................................................................... 899,378 674,453
------------ ------------
Total assets ................................................................... $ 53,300,073 $ 48,251,152
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit .......................................................... $ 8,098,956 $ 6,084,209
Acquisition notes payable ................................................ 1,672,240 --
Current maturities of long-term debt ..................................... 1,184,372 1,218,253
Accounts payable ......................................................... 6,482,403 6,297,204
Accrued liabilities ...................................................... 3,671,469 3,681,368
------------ ------------
Total current liabilities ............................................. 21,109,440 17,281,034
Notes payable - banks .......................................................... 4,864,224 5,643,945
Acquisition notes payable ...................................................... 600,000 --
Subordinated long-term debt .................................................... 5,837,853 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 November 30, 1999 and
February 28, 1999, respectively ......................................... 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 November 30, 1999 and
February 28, 1999, respectively ......................................... 2,685 2,655
Additional paid-in capital ............................................... 8,945,853 8,746,876
Retained earnings ........................................................ 11,566,172 9,147,105
Cost of stock held in treasury ........................................... (57,900) (57,900)
Accumulated other comprehensive income ................................... (433,301) (277,000)
------------ ------------
20,360,169 $ 17,898,396
------------ ------------
Total liabilities and shareholders' equity ..................................... $ 53,300,073 $ 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 NINE MONTHS AND THREE MONTHS ENDED NOVEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
NOVEMBER 30 NOVEMBER 30,
----------- ------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales .................................... $ 84,489,837 $ 73,128,758 $ 28,230,599 $ 24,106,293
Cost of goods sold ........................... 58,945,812 51,529,234 19,562,607 16,842,804
------------ ------------ ------------ ------------
Gross profit ............................... 25,544,025 21,599,524 8,667,992 7,263,489
------------ ------------ ------------ ------------
Costs and expenses
Shipping ................................... 6,491,448 5,389,528 2,184,524 1,880,962
General and administrative ................. 7,054,323 6,179,622 2,342,910 1,978,423
Selling and marketing ...................... 7,085,065 5,910,031 2,455,210 1,952,329
Other expense (income), net ................ 5,798 57,580 (4,128) 26,548
------------ ------------ ------------ ------------
20,636,634 17,536,761 6,978,516 5,838,262
------------ ------------ ------------ ------------
Operating income ............................. 4,907,391 4,062,763 1,689,476 1,425,227
Interest income .............................. 77,878 90,919 21,734 30,767
Interest expense ............................. (1,348,460) (1,317,082) (431,994) (424,342)
------------ ------------ ------------ ------------
Income before provision for income taxes and
extraordinary item ......................... 3,636,809 2,836,600 1,279,216 1,031,652
Provision for income taxes ................... 1,387,532 1,064,930 504,369 386,028
------------ ------------ ------------ ------------
2,249,277 1,771,670 774,847 645,624
Extraordinary item, gain on early
extinguishment of debt ..................... 181,559 -- 181,559 --
------------ ------------ ------------ ------------
Net Income ................................... $ 2,430,836 $ 1,771,670 $ 956,406 $ 645,624
============ ============ ============ ============
Basic and diluted net income per common share:
Income before extraordinary item ........... $ 0.84 $ 0.66 $ 0.29 $ 0.24
Extraordinary item ......................... $ 0.07 $ -- $ 0.07 $ --
------------ ------------ ------------ ------------
Net income per share ....................... $ 0.91 $ 0.66 $ 0.36 $ 0.24
============ ============ ============ ============
Weighted average number of shares outstanding 2,689,622 2,689,498 2,695,464 2,659,963
============ ============ ============ ============
</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, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30, 1999 NOVEMBER 30,1998
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 2,430,836 $ 1,771,670
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of equipment ............................ -- (91,571)
Depreciation and amortization ........................ 1,120,674 980,414
Provision for doubtful accounts ...................... 373,641 145,244
Gain on early extinguishment of debt ................. (181,559) --
Deferred income taxes ................................ 513,293 440,419
Changes in assets and liabilities, net of acquisitions
Accounts receivable ................................ (104,399) (759,713)
Inventories ........................................ (7,488) (656,010)
Prepaid expenses ................................... (51,501) 191,988
Other assets ....................................... (144,794) 149,445
Accounts payable and accrued liabilities ........... (706,789) (286,891)
----------- -----------
Net cash provided by operating activities .......... 3,241,914 1,884,995
----------- -----------
Cash flows from investing activities:
Capital expenditures ................................. (491,928) (907,020)
Purchase of trademarks ............................... (833,050) --
Proceeds from sale of fixed assets ................... -- 80,734
Acquisitions, net of cash acquired ................... (1,605,365) --
----------- -----------
Net cash used in investing activities .............. (2,930,343) (826,286)
----------- -----------
Cash flows from financing activities:
Net borrowings under lines of credit ............... 1,790,291 168,548
Repayments of long-term debt ....................... (926,172) (1,002,768)
Repayments of acquisition notes payable ............ (263,460) --
Purchase of subordinated debentures ................ (1,093,817) --
Proceeds from exercise of stock options ............ 199,008 --
Payments on notes receivable ....................... 581,893 647,383
Dividends .......................................... (11,771) (11,000)
----------- -----------
Net cash provided by (used in) financing activities 275,972 (197,837)
----------- -----------
Cumulative currency translation adjustment ............... (156,301) (105,072)
----------- -----------
Net increase in cash ..................................... 431,242 755,800
Cash and cash equivalents at beginning of period ......... 290,066 239,984
----------- -----------
Cash and cash equivalents at end of period ............... $ 721,308 $ 995,784
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ...................................... $ 1,281,000 $ 1,092,000
Income taxes paid .................................. $ 1,357,000 $ 100,000
</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 nine and three months ended
November 30, 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:
NOVEMBER 30, 1999 FEBRUARY 28, 1999
----------------- -----------------
Raw materials and work-in-process $ 4,257,740 $ 3,881,685
Finished goods .................. 12,088,343 11,274,452
----------- -----------
$16,346,083 $15,156,137
=========== ===========
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 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 nine months and three months
ended November 30, 1998, the weighted average number of basic shares of common
stock outstanding amounted to 2,654,894. For the nine months and the three
months ended November 30, 1999, the weighted average number of basic shares of
common stock outstanding amounted to 2,673,783 and 2,684,894, respectively. For
the nine months ended November 30, 1999 and November 30, 1998, the weighted
average number of diluted shares of common stock outstanding amounted to
2,689,622 and 2,689,498, respectively. For the three months ended November 30,
1999 and November 30, 1998, the weighted average number of diluted shares of
common stock outstanding amounted to 2,695,464 and 2,659,963, respectively.
6
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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 nine months ended November 30, 1999 and 1998, the Company's
comprehensive income totaled $2,274,535 and $1,666,598, respectively. For the
three months ended November 30, 1999 and 1998, the Company's comprehensive
income totaled $890,334 and $683,624, 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 and accurately document, designate and
assess the effectiveness of transactions that receive hedge.
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 fiscal year 1999 presentation have been reclassified to
conform to the fiscal year 2000 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 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 the assumptions upon which
the Company basis its assessment of its future working capital and capital
expenditure requirements could prove to be different then expected and those
relating to the Company's ability to satisfy its working capital needs and to
finance its anticipated capital expenditures, the Company's anticipation of the
performance by the lender under the interest rate swap agreements and its
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
NINE MONTHS ENDED NOVEMBER 30 ,1999 COMPARED TO NINE MONTHS ENDED
NOVEMBER 30, 1998
Net sales for the nine months ended November 30, 1999 (the "fiscal 2000
period") were approximately $84,490,000 compared to approximately $73,129,000
for the nine months ended November 30, 1998 (the "fiscal 1999 period"), an
increase of $11,361,000 or 15.5%. Although selling prices remained relatively
stable from the fiscal 1999 period, there was an increase in the volume of sales
to substantially all of the Company's customer groups, especially home centers
which was primarily the result of certain home centers expanding their offering
of certain of the Company's product lines. Additionally, approximately
$2,000,000 of volume was derived from sales attributable to companies acquired
by the Company during the second and third quarter of the fiscal 2000 period.
Gross profit for the fiscal 2000 period was approximately $25,544,000
compared to $21,600,000 for the fiscal 1999 period, an increase of $3,944,000 or
18.3%. As a percentage of net sales, gross profit increased to 30.2% in the
fiscal 2000 period from 29.5% in the fiscal 1999 period primarily as a result
of a change in product mix.
Shipping expenses for the fiscal 2000 period were approximately
$6,491,000 compared to $5,390,000 for the fiscal 1999 period, an increase of
$1,101,000 or 20.4%. As a percentage of net sales, these expenses increased to
7.7% in the fiscal 2000 period from 7.4% in the fiscal 1999 period, primarily as
a result of an increase in freight rates charged by common carriers and expenses
incurred for the repositioning of inventories related to the increase in sales
volume.
General and administrative expenses for the fiscal 2000 period were
approximately $7,054,000 compared with approximately $6,180,000 for the fiscal
1999 period, an increase of $874,000 or 14.1%. As a percentage of net sales,
these expenses decreased to 8.3% in the fiscal 2000 period from 8.5% in the
fiscal 1999 period reflecting the leveraging of these
8
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costs over greater sales. The actual increase related principally to employee
related cost and expenses together with an increase in reserves against certain
accounts receivable.
Selling and marketing costs for the fiscal 2000 period were
approximately $7,085,000 compared to $5,910,000 for the fiscal 1999 period, an
increase of $1,175,000 or 19.9%. As a percentage of net sales, these expenses
increased to 8.4% in the fiscal 2000 period from 8.1% in the fiscal 1999 period.
The increase is primarily the result of increased commissions resulting from
higher sales volume, additional personnel and an increase in certain rebate and
royalty agreements.
Interest income for the fiscal 2000 period was approximately $78,000
compared to $91,000 in the fiscal 1999 period. Interest expense for the fiscal
2000 period was approximately $1,348,000 compared to approximately $1,317,000 in
the fiscal 1999 period. Interest expense increased primarily as a result of an
increase in short-term borrowings to fund the inventory and accounts receivable
increase caused by the higher sales volume. This was partially offset by
repayments of long-term debt.
During the third quarter of the fiscal 2000 period, the Company
repurchased approximately $1,229,000 of its 8% Subordinated Debentures issued in
1997 to mature in April 2001. The transaction resulted in an extraordinary gain
from the early extinguishment of debt approximating $182,000.
Provision for income taxes was approximately $1,388,000 in the fiscal
2000 period compared to approximately $1,065,000 in the fiscal 1999 period, an
increase of $323,000 or 30.3%. The effective tax rate was approximately 38.2%
and 37.5% for the fiscal 2000 and fiscal 1999 periods, respectively. The
estimated tax rate is based upon the most recent effective tax rates available
and is slightly higher in the fiscal 2000 period due to higher foreign tax rates
associated with the Company's recent acquisitions.
As a result of the above, net income for the fiscal 2000 period
increased to $2,431,000 from $1,772,000 in the fiscal 1999 period, an increase
of $659,000 or 37.2%. Further, net income as a percentage of net sales increased
to 2.9% in fiscal 2000 compared to 2.4% in fiscal 1999. Exclusive of the
extraordinary item, net income increased $477,000 to $2,249,000 (26.9%) and net
income as a percentage of net sales increased to approximately 2.7%.
THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1998.
Net sales for the three months ended November 30, 1999 ("fiscal 2000
quarter") were approximately $28,231,000 compared to approximately $24,106,000
for the three months ended November 30, 1999 ("fiscal 1999 quarter"), an
increase of $4,125,000 or 17.1%. Approximately $1,900,000 of the increase was
the result of sales attributable to companies acquired by the Company while the
remainder was the continuation of the expansion of the Company's product lines
at certain home center customers.
Gross profit for the fiscal 2000 quarter was approximately $8,668,000
compared to approximately $7,263,000 in the fiscal 1999 quarter, an increase of
$1,405,000 or 19.3%. As a percentage of net sales, gross profit increased from
30.1% in the fiscal 1999 quarter to 30.7% in the fiscal 2000 quarter due
primarily to a change in product mix and a slight increase in favorable
production variances resulting from an increase in production capacity.
Shipping expenses for the fiscal 2000 quarter were approximately
$2,185,000 compared to approximately $1,881,000 for the fiscal 1999 quarter, an
increase of $304,000 or 16.2%. As a percentage of net sales, these expenses
remained relatively stable at 7.8%. The actual increase results substantially
from the increase in sales volume.
General and administrative expenses for the fiscal 2000 quarter were
approximately $2,343,000 compared to approximately $1,978,000 for the fiscal
1999 quarter, an increase of $365,000 or 18.5%. As a percentage of net sales,
general and administrative expenses remained relatively stable at approximately
8.3% in the fiscal 2000 quarter compared
9
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to 8.2% in the fiscal 1999 quarter. The actual increase was primarily the result
of an increase in reserves associated with certain accounts receivable and an
increase in personnel costs.
Selling and marketing costs for the fiscal 2000 quarter were
approximately $2,455,000 compared to approximately $1,952,000 for the fiscal
1999 quarter, an increase of $503,000 or 25.8%. As a percentage of net sales,
these expenses increased to 8.7% in the fiscal 2000 quarter from 8.1% in the
fiscal 1999 quarter. The percentage increase is primarily a result of an
increase in certain rebate and royalty agreements. The actual increase is the
result of the higher sales volume.
Interest income for the fiscal 2000 quarter was approximately $22,000
compared to $31,000 for the fiscal 1999 quarter. Interest expense for the fiscal
2000 quarter was approximately $432,000 compared to approximately $424,000 in
the fiscal 1999 quarter. Interest expense increased as a result of an increase
in short-term borrowings to fund the increase in accounts receivable and
inventory resulting from the higher sales volume.
During the third quarter of fiscal 2000, the Company repurchased
approximately $1,229,000 of its 8% Subordinated Debentures issued in 1997 to
mature in April 2001. The transaction resulted in an extraordinary gain from the
early extinguishment of debt approximating $182,000.
Provision for income taxes was approximately $504,000 in the fiscal
2000 quarter compared to approximately $386,000 for the fiscal 1999 quarter, an
increase of $118,000 or 30.6%. The effective tax rate was approximately 39.4%
for the fiscal 2000 quarter and 37.4% for the fiscal 1999 quarter. The estimated
tax rate is based upon the most recent tax rates available and is slightly
higher in the fiscal 2000 quarter to reflect the higher international tax rates
associated with the Company's recent acquisitions.
As a result of the above, net income for the fiscal 2000 quarter was
approximately $956,000 compared to approximately $646,000 for the fiscal 1999
quarter, an increase of $310,000 or 48.0%. Exclusive of the extraordinary item,
the increase in net income was approximately $128,000 or 19.8%. As a percentage
of net sales, net income increased to 3.4% in the fiscal 2000 quarter from 2.7%
in the fiscal 1999 quarter. Exclusive of the extraordinary item, the fiscal 2000
quarter net income approximated 2.7% of net sales.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of November 30, 1999 decreased from approximately
$15,021,000 at February 28, 1999 to $13,431,000, a decrease of $1,590,000,
primarily as a result of the utilization of working capital to repurchase
subordinated long-term debt and the recent acquisitions. 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 2000 period
was $3,242,000 compared to $1,885,000 for the comparable fiscal 1999 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 a substantial decrease in accounts
payable and accrued liabilities. Net cash used in investing activities was
$2,930,000 compared to $826,000 for the comparable fiscal 1999 period. The
increase results principally from the acquisition of certain foreign
subsidiaries.
For the fiscal 2000 period, cash provided by financing activities was
$276,000 which was primarily the result of an increase in short-term borrowings
to fund the recent acquisitions offset by repayments of long-term debt. Net cash
used by financing activities was $198,000 in the fiscal 1999 period which was
primarily the result of repayments of long-term debt offset by collections of
notes receivable.
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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 (5.59% at November 30, 1999) plus 1.25% 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 collateralized
by accounts receivable, inventory, equipment and certain real property and,
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 November 30, 1999, the Company
had $5,490,000 available for future borrowings under the domestic credit
facility, net of $160,000 in outstanding letters of credit, and $1,697,000 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. During the third quarter of fiscal 2000, the Company
repurchased approximately $1,229,000 of such debentures resulting in an
extraordinary gain from early extinguishment of debt approximating $182,000. At
November 30, 1999 and February 28, 1999, the remaining amortized balance of this
obligation was $5,838,000 and $6,899,000, respectively. In connection with the
recent acquisitions, the Company issued four notes to the related sellers. Three
of the notes, aggregating approximately $1,372,000 are payable within one year
and are non-interest bearing. The fourth note, amounting to $900,000, is payable
in equal installments over a three year period with interest at the Company's
prevailing borrowing rate.
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. For the nine and three months ended
November 30, 1999, the Company reduced interest expense by approximately $16,000
and $6,000, 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 first interest rate swap agreement
in the amount of $1,500,000 expired on December 23, 1999.
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. As is true for most companies, the Company faces a
risk from the Year 2000 issue. It is the Company's intention for the disclosures
and announcements concerning its products and Year 2000 programs, including
those in this report on Form 10-Q, to constitute "Year 2000 Readiness
Disclosures" as defined in the Year 2000 Information and Readiness Disclosure
Act.
11
<PAGE>
While not all Year 2000-date related disruption scenarios have been
experienced, and there is a possibility of disruptions in the future, through
the date of this report, the Company has experienced no material disruption or
other significant problems. The Company continues to evaluate and mitigate its
exposure in areas where appropriate. Based on currently available information,
management continues to believe that Year 2000-related disruptions or other
problems, if any, will not have a significant adverse impact on the Company's
operational results or financial condition. However, the Company cannot be
certain that Year 2000 issues will not have a material adverse impact on it,
since the evaluation process is not yet complete and it is early in the Year
2000.
The Company believes that its most reasonably likely worst case Year
2000 scenario would relate to problems with the systems and services of third
parties rather than with the Company's internal systems or products. The Company
cannot identify all possible disruption scenarios; however, contingency plans
for critical business operations are in place. These plans will continue to be
validated and modified as needed as the Company learns about disruptions, if
any, caused by the Year 2000 date rollover. All costs associated with year 2000
compliance were funded with cash flow generated from operations, expensed as
incurred and did not have a material effect on the financial position or results
of operations of the Company.
12
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT 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. For the nine and three months ended
November 30, 1999, the Company reduced interest expense by approximately $16,000
and $6,000, 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 first interest rate swap agreement
in the amount of $1,500,000 expired on December 23, 1999.
The Company averaged approximately $8,047,000 and $9,465,000 of debt
not covered by the interest rate swap agreements during the nine and three
months ended November 30, 1999. If interest rates would have increased by 10%,
the effect on the Company would have been an increase in interest expense of
approximately $50,000 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 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 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, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Q.E.P. CO., INC.
Dated: January 13, 2000 By: /s/ LEWIS GOULD
--------------------------------------------------
Lewis Gould, Chairman, Chief Executive Officer and
Director (Principal Executive Officer)
Dated: January 13, 2000 By: /s/ MARC P. APPLEBAUM
-------------------------------------------------
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------ ----------- --------
27 Financial Data Schedule *1
*1 Filed electronically pursuant to Item 401 of Regulation S-T.
16
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 721,308
<SECURITIES> 0
<RECEIVABLES> 15,560,822
<ALLOWANCES> (655,000)
<INVENTORY> 16,346,083
<CURRENT-ASSETS> 34,540,080
<PP&E> 12,283,172
<DEPRECIATION> (8,389,471)
<TOTAL-ASSETS> 53,300,073
<CURRENT-LIABILITIES> 21,109,440
<BONDS> 0
0
336,660
<COMMON> 2,685
<OTHER-SE> 20,020,824
<TOTAL-LIABILITY-AND-EQUITY> 53,300,073
<SALES> 84,489,837
<TOTAL-REVENUES> 84,489,837
<CGS> 58,945,812
<TOTAL-COSTS> 20,636,634
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,270,582)
<INCOME-PRETAX> 3,636,809
<INCOME-TAX> 1,387,532
<INCOME-CONTINUING> 2,249,277
<DISCONTINUED> 0
<EXTRAORDINARY> 181,559
<CHANGES> 0
<NET-INCOME> 2,430,836
<EPS-BASIC> .91
<EPS-DILUTED> .91
</TABLE>
