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, 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 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 13, 2000: 3,368,620 shares of common stock, par
value $.001 per share.
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Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
August 31, 2000 (Unaudited) and February 29, 2000*....................................................... 3
Consolidated Statements of Income (Unaudited)
For the Six and Three Months Ended August 31, 2000 and 1999.............................................. 4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended August 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....................... 9
Item 3 - Qualitative and Quantitative Disclosures about Market Risk.................................................. 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................................................................... 15
Item 4 - Submission of Matters to a Vote of Security Holders......................................................... 15
Item 6 - Exhibits and Reports on Form 8-K............................................................................ 16
Signatures........................................................................................................... 17
</TABLE>
* 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.
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, 2000 AND FEBRUARY 29, 2000
<TABLE>
<CAPTION>
August 31, February 29,
2000 2000*
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents ................................................. $ 889,954 $ 829,063
Accounts receivable, less allowance for
doubtful accounts of $574,000 and $741,000 at
August 31, 2000 and February 29, 2000, respectively .................... 16,421,270 16,176,540
Notes receivable .......................................................... 1,406,326 1,681,210
Inventories ............................................................... 19,978,492 17,588,885
Prepaid expenses .......................................................... 703,834 972,992
Deferred Income Taxes ..................................................... 752,630 752,630
------------ ------------
Total current assets ................................................... 40,152,506 38,001,320
Property and equipment, net ..................................................... 5,597,860 4,329,695
Deferred income taxes ........................................................... 895,130 1,271,445
Intangible assets, net .......................................................... 15,471,254 13,251,699
Notes receivable ................................................................ 59,540 42,339
Other assets .................................................................... 729,627 818,215
------------ ------------
TOTAL ASSETS .................................................................... $ 62,905,917 $ 57,714,713
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit ........................................................... $ 13,462,375 $ 10,414,746
Acquisition notes payable ................................................. 932,500 1,872,500
Current maturities of long term debt ...................................... 1,319,331 1,470,092
Accounts payable .......................................................... 8,554,760 6,452,570
Accrued liabilities ....................................................... 2,971,404 4,280,901
------------ ------------
Total current liabilities .............................................. 27,240,370 24,490,809
Notes payable ................................................................... 4,051,080 4,584,076
Acquisition notes payable ....................................................... 2,392,500 1,112,500
Subordinated long term debt ..................................................... 5,997,671 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 August 31, 2000 and February 29, 2000 . 336,660 336,660
Common stock, 20,000,000 shares authorized, $.001 par value; 3,368,620
and 3,356,175 shares issued and outstanding at August 31, 2000 and
February 29, 2000, respectively ........................................ 3,368 3,356
Additional paid-in capital ................................................ 9,009,593 8,946,061
Retained earnings ......................................................... 14,129,508 12,337,614
Cost of stock held in treasury ............................................ (289,088) (57,900)
Accumulated other comprehensive income .................................... (419,031) (382,875)
------------ ------------
$ 22,771,010 $ 21,182,916
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................... $ 62,905,917 $ 57,714,713
============ ============
</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, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
----------------------------- -----------------------------
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales ................................................ $ 59,741,246 $ 56,259,238 $ 28,181,108 $ 29,092,177
Cost of goods sold ....................................... 40,563,517 39,383,205 18,807,894 20,660,778
------------ ------------ ------------ ------------
Gross profit ........................................... 19,177,729 16,876,033 9,373,214 8,431,399
------------ ------------ ------------ ------------
Costs and expenses
Shipping ............................................... 4,717,370 4,306,924 2,388,828 2,179,211
General and administrative ............................. 5,044,665 4,711,413 2,343,244 2,452,812
Selling and marketing .................................. 5,628,848 4,629,855 2,845,855 2,207,599
Other (income) expense ................................. (46,097) 9,926 (71,753) 18,472
------------ ------------ ------------ ------------
15,344,786 13,658,118 7,506,174 6,858,094
------------ ------------ ------------ ------------
Operating income ......................................... 3,832,943 3,217,915 1,867,040 1,573,305
Interest income .......................................... 43,413 56,144 11,288 28, 370
Interest expense ......................................... (971,991) (916,466) 497,149 (483,189)
------------ ------------ ------------ ------------
Income before provision for income taxes ................. 2,904,365 2,357,593 1,381,179 1,118,486
Provision for income taxes ............................... 1,106,491 883,163 526,150 416,887
------------ ------------ ------------ ------------
Net income ............................................... $ 1,797,874 $ 1,474,430 $ 855,029 $ 701,599
============ ============ ============ ============
Basic and diluted net income per
common share ............................................ $ 0.53 $ 0.44 $ 0.25 $ 0.21
============ ============ ============ ============
</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, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
August 31, August 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................................... $ 1,797,874 $ 1,474,430
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of equipment ........................................................ (74,421) --
Depreciation and amortization .................................................... 984,577 774,720
Bad debt expense ................................................................. 50,449 248,601
Deferred income taxes ............................................................ 376,315 170,000
Changes in assets and liabilities, net of acquisitions:
Accounts receivable ......................................................... (140,300) 27,164
Inventories ................................................................. (2,076,184) (166,374)
Prepaid expenses ............................................................ 269,159 (91,074)
Other assets ................................................................ (768,805) (67,939)
Accounts payable and accrued liabilities .................................... 716,982 (1,931,407)
----------- -----------
Net cash provided by operating activities ................................... 1,135,646 438,121
----------- -----------
Cash flows from investing activities:
Capital expenditures ........................................................ (566,878) (287,886)
Purchase of license agreement ............................................... (200,000) (833,050)
Acquisitions, net of cash acquired .......................................... (1,116,517) (1,149,700)
Proceeds from sale of fixed assets .......................................... 75,000 --
----------- -----------
Net cash used in investing activities ....................................... (1,808,395) (2,270,636)
----------- -----------
Cash flow from financing activities:
Net borrowings under lines of credit ........................................ 3,047,629 3,265,791
Repayments of long-term debt ................................................ (671,649) (653,300)
Purchase of subordinated debentures ......................................... -- (107,143)
Repayment of acquisition notes payable ...................................... (1,690,243) (64,200)
Payments received on notes receivable ....................................... 257,683 379,184
Proceeds from exercise of stock options ..................................... 63,750 199,008
Purchase of treasury stock .................................................. (231,189) --
Dividends ................................................................... (6,185) (6,185)
----------- -----------
Net cash provided by financing activities ................................... 769,796 3,013,155
----------- -----------
Cumulative currency translation adjustment ....................................... (36,156) (90,229)
Net increase in cash ............................................................. 60,891 1,090,411
Cash and cash equivalents at beginning of period ................................. 829,063 290,066
----------- -----------
Cash and cash equivalents at end of period ....................................... $ 889,954 $ 1,380,477
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ............................................................... $ 834,041 $ 909,783
Income taxes paid ........................................................... $ 1,195,473 $ 937,500
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
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 fiscal 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 six and three months ended August 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:
August 31, February 29,
2000 2000
----------- -----------
Raw materials and work-in-process ...... $ 6,853,495 $ 4,576,530
Finished goods ......................... 13,124,997 13,012,355
----------- -----------
$19,978,492 $17,588,885
=========== ===========
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, 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, 2000, the weighted
average number of basic shares of common stock outstanding amounted to 3,364,640
and 3,368,663, respectively. 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 3,335,284 and 3,347,784, respectively. For the six
months ended August 31, 2000 and August 31, 1999, the weighted average number of
diluted shares of common stock outstanding amounted to 3,404,736 and 3,359,564,
respectively. For the three months ended August 31, 2000 and August 31, 1999,
the weighted average number of diluted shares of common stock outstanding
amounted to 3,408,759 and 3,363,373, respectively.
6
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Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
which was paid on August 1, 2000. As a result of this action, approximately
673,000 shares were 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 retained earnings to common stock.
The effect on earnings per share was a reduction of $0.13 and $0.11 per
share for the six months ended August 31, 2000 and 1999, respectively, and a
reduction of $0.06 and $0.05 per share for the three months ended August 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.
For the six months ended August 31, 2000 and 1999, the Company's
comprehensive income totaled $1,761,718 and $1,384,201, respectively. For the
three months ended August 31, 2000 and 1999, the Company's comprehensive income
totaled $834,223 and $642,266, 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 by
the licensee. The company is guaranteed to receive 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 six months ended August 31,
2000 and 1999, the Company sold approximately $2,910,000, and $7,293,000,
respectively and for the three months ended August 31, 2000 and 1999, the
Company sold approximately $25,000 and $3,856,000, respectively of tackless
carpet strip to U.S. flooring products distributors.
Note 7. Non-cash Investing and Financing Activities
During the six months ended August 31, 2000, the Company made several
strategic acquisitions. In connection with the acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $1,593,302
Cash paid 1,116,517
----------
Liabilities assumed $ 476,785
==========
Issuance of notes to related sellers $1,965,700
==========
7
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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.
Note 9. Reclassifications
Certain amounts in the 1999 presentation have been reclassified to
conform to the 2000 presentation.
8
<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 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 August 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 "newly
acquired entities" 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 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 the newly
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
Six months ended August 31, 2000 compared to six months ended August 31,
1999
Net sales for the six months ended August 31, 2000 (the "fiscal 2001
period") were approximately $59,741,000 compared to approximately $56,259,000
for the six months ended August 31, 1999 (the "fiscal 2000 period"), an increase
of $3,482,000 or 6.2%. This increase includes the effect of the license of the
Company's distributor tack strip business. Sales of tack strip during the
comparable fiscal 2000 period that the license agreement was in effect were
$4,400,000. This negative impact was offset by a substantial increase in sales
to home center retailers, principally as a result of new store openings and new
product introduction to existing stores. Selling prices remained relatively
stable during the period. Additionally, the newly acquired entities accounted
for approximately $3,568,000 of the increase in sales volume.
Gross profit for the fiscal 2001 period was approximately $19,178,000
compared to $16,876,000 for the fiscal 2000 period, an increase of $2,302,000 or
13.6%. As a percentage of net sales, gross profit increased to 32.1% in the
fiscal 2001 period from 30.0% in the fiscal 2000 period. This increase was
primarily the result of a change in the Company's domestic product mix towards
higher
9
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margin products and the discontinuance of the sale to domestic distributors of
the low margin tack strip business.
Shipping expenses for the fiscal 2001 period were approximately
$4,717,000 compared to $4,307,000 for the fiscal 2000 period, an increase of
$410,000 or 9.5%. As a percentage of net sales, these expenses increased to 7.9%
in the fiscal 2001 period from 7.7% in the fiscal 2000 period primarily as a
result of certain fixed costs being absorbed by a smaller sales volume after the
licensing of the tack strip business. The actual increase is a result of the
higher overall sales volume and approximately $200,000 incurred by the newly
acquired entities.
General and administrative expenses for the fiscal 2001 period were
approximately $5,045,000 compared with approximately $4,711,000 for the fiscal
2000 period, an increase of $334,000 or 7.1%. As a percentage of net sales,
these expenses were unchanged at 8.4% for the fiscal 2001 and the fiscal 2000
periods. The actual increase was the result of approximately $553,000 being
attributable to the newly acquired entities offset by a reduction of expenses at
the Company's domestic divisions.
Selling and marketing costs for the fiscal 2001 period were
approximately $5,629,000 compared to $4,630,000 for the fiscal 2000 period, an
increase of $999,000 or 21.6%. As a percentage of net sales, these expenses
increased to 9.4% in the fiscal 2001 period from 8.2% in the fiscal 2000 period,
principally due to reduced volume after the licensing of the tack strip business
and an increase in commission rates paid to the Company's sales force. The
actual increase is the result of increased commissions and marketing allowances
paid resulting from the increase in sales to the Home Center customers, and
approximately $410,000 attributable to the newly acquired entities.
Interest income for the fiscal 2001 period was approximately $43,000
compared to $56,000 in the fiscal 2000 period. Interest expense for the fiscal
2001 period was approximately $972,000 compared to approximately $916,000 in the
fiscal 2000 period. Interest expense increased as a result of an increase in
borrowings under the Company's line of credit facilities to fund the
acquisitions and working capital needs together with an increase in interest
rates offset in part by a reduction of long-term debt.
Provision for income taxes was approximately $1,106,000 in the fiscal
2001 period compared to approximately $883,000 in the fiscal 2000 period, an
increase of $223,000 or 25.3%. The effective tax rate was approximately 38.1%
for the fiscal 2001 period and 37.4% 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 newly acquired entities.
As a result of the above, net income for the fiscal 2001 period
increased to $1,798,000 from $1,474,000 in the fiscal 2000 period, an increase
of $324,000 or 22.0%. Net income as a percentage of net sales increased to 3.0%
in the fiscal 2001 period compared to 2.6% in the fiscal 2000 period.
Three months ended August 31, 2000 compared to three months ended August
31, 1999.
Net sales for the three months ended August 31, 2000 were approximately
$28,181,000 compared to approximately $29,092,000 for the three months ended
August 31, 1999, a decrease of $911,000 or 3.1%. This decrease is principally
the result of the licensing of the domestic distributor tack strip business
which had sales of approximately $3,856,000 in the fiscal 2000 period.
Offsetting this decrease was an increase in sales volume attributable to (i)
Home Center customers as a result of new
10
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store openings and the expansion of certain product lines offered by the
Company, and (ii) an increase in sales volume of approximately $1,440,000
attributable to the newly acquired entities. Selling prices remained relatively
stable during this period.
Gross profit for the fiscal 2001 period was approximately $9,373,000
compared to approximately $8,431,000 in the fiscal 2000 period, an increase of
$942,000 or 11.2%. As a percentage of net sales, gross profit increased from
29.0% in the fiscal 2000 period to 33.3% in the fiscal 2001 period due to a
change in the Company's domestic product mix towards higher margin products, the
licensing of the low margin tack strip business and higher gross margins
generated by the newly acquired entities, principally powders.
Shipping expenses for the fiscal 2001 period were approximately
$2,389,000 compared to approximately $2,179,000 for the fiscal 2000 period, an
increase of $210,000 or 9.6%. As a percentage of net sales, these expenses
increased to 8.5% in the fiscal 2001 period from 7.5% in the fiscal 2000 period
primarily due to a change in the Company's freight policy for certain domestic
distributor customers and the Company's fixed expenses being spread over lower
sales. The actual increase was primarily caused by the increased sales volume
together with approximately $100,000 being expended by the newly acquired
entities.
General and administrative expenses for the fiscal 2001 period were
approximately $2,343,000 compared to approximately $2,453,000 for the fiscal
2000 period, a decrease of $110,000 or 4.5%. As a percentage of net sales,
general and administrative expenses decreased from 8.4% in the fiscal 2000 to
8.3% in the fiscal 2001 period, reflecting a slight reduction of expense at the
Company's domestic divisions. The actual decrease was primarily the result of
lower employee related costs and expenses, domestically offset by approximately
$233,000 being attributable to the newly acquired entities.
Selling and marketing costs for the fiscal 2001 period were
approximately $2,846,000 compared to approximately $2,208,000 for the fiscal
2000 period, an increase of $638,000 or 28.9%. As a percentage of net sales,
these expenses increased to 10.1% in the fiscal 2001 period from 7.6% in the
fiscal 1999 period. The percentage increase is primarily the result of increased
costs being spread over a reduced sales volume and a change in the domestic
distributor commission structure. The actual increase is a result of an increase
in commissions and allowances resulting from higher sales to the Company's Home
Center customers together with approximately $200,000 being attributable to the
newly acquired entities.
Interest income for the fiscal 2001 period was approximately $11,000
compared to approximately $28,000 in the fiscal 2000 period. Interest expense
for the fiscal 2001 period was approximately $497,000 compared to approximately
$483,000 in the fiscal 2000 period. Interest expense increased as a result of
the increase in borrowings under the Company's line of credit facilities and an
increase in interest rates.
Provision for income taxes was approximately $526,000 in the fiscal
2001 period compared to approximately $417,000 for the fiscal 2000 period, an
increase of $109,000 or 26.1%. The estimated tax rate was approximately 38.1%
for the fiscal 2001 period compared to 37.3% 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 newly acquired
entities.
As a result of the above, net income for the fiscal 2001 period was
approximately $855,000 compared to approximately $702,000 for the fiscal 2000
period, an increase of $153,000 or 21.8%. Net income as a percentage of net
sales increased to 3.0% in the fiscal 2001 period, compared to 2.4% in the
fiscal 2000 period.
11
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Liquidity and Capital Resources
Working capital as of August 31, 2000 decreased from approximately
$13,510,000 at February 29, 2000 to $12,913,000, a decrease of $597,000,
primarily as a result of the Company's increase in operations offset by the
purchase of certain newly acquired entities, capital expenditures and treasury
stock. 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, 2000 was $1,136,000 compared to $438,000 for the comparable
period in fiscal 2000. The increase in cash provided by operating activities was
primarily as a result of an increase in income from operations offset by an
increase in inventory. Net cash used in investing activities was $1,808,000
compared to $2,271,000 for the comparable period in fiscal 2000, primarily due
to the acquisition of certain newly acquired entities and approximately $567,000
for capital expenditures.
Net cash provided by financing activities was $770,000 compared to
$3,013,000 in the comparable period in fiscal 2000 due primarily to an increase
in short term borrowings to fund working capital needs and certain of the newly
acquired entities, offset by partial repayments of the Company's revolving
credit and term loan facility and acquisition debt.
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 (6.6% at August 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 August 31, 2000, the Company had approximately
$1,480,000 available for future borrowings, net of $160,000 in outstanding
letters of credit.
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 permits total borrowings of up to $95,000, is secured by a standby letter
of credit given by the Company. The facilities expire on October 31, 2000. At
August 31, 2000, the Chilean subsidiary had approximately $15,000 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 August 31, 2000 and February
29, 2000, the remaining amortized balance of this obligation was $5,998,000 and
$5,891,000, respectively. In connection with the newly acquired entities, the
Company
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issued five promissory notes to the respective sellers. Two of the notes,
aggregating approximately $1,260,000, have been paid as of August 31, 2000 and
were 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 two installments of $312,500 in
December 2000 and 2001 and a final installment of $200,000 in December 2003 with
interest fixed at $12,500, $12,500 and $25,000, respectively. The fifth note, in
the original principal amount of $1,600,000, is payable quarterly at $80,000
plus interest at 8% from October 1, 2000 through October 1, 2005.
Subsequent to August 31, 2000, the Company entered into an agreement to
purchase its Bramalea, Ontario facility for approximately $988,000. In
connection with this purchase, the Company paid approximately $318,000 in cash
and obtained a note from a Canadian lending institution for approximately
$670,000 payable over 10 years at an interest rate, to be set annually, (7.8% at
the date of issuance).
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 six and three months ended
August 31, 2000, the Company reduced interest expense by approximately $30,000
and $15,000, 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 second interest
rate swap agreement in the amount of $4,000,000 expires in December 2000.
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, except for additional acquisitions. There can be no assurance,
however, that the assumptions upon which the Company basis its future working
capital and capital expenditure requirements and the assumptions upon which it
basis 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.
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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 six and three months ended
August 31, 2000, the Company reduced interest expense by approximately $30,000
and $15,000, 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 second interest
rate swap agreement in the amount of $4,000,000 expires in December 2000.
The Company averaged approximately $13,931,000 and $13,482,000 of debt
not covered by the interest rate swap agreements during the six and three months
ended August 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
$66,000 and $64,000, respectively.
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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 4. Submission of Matters to Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on July 14,
2000. The following matters were voted upon at the Annual Meeting:
(i) The election of the following seven members to the Company's Board of
Directors:
Leonard Gould votes for: 1,157,384 votes withheld: 62,244
Lewis Gould votes for: 1,158,465 votes withheld: 61,163
Christian Nast votes for: 1,153,575 votes withheld: 66,053
Emil Vogel votes for: 1,153,565 votes withheld: 66,063
Robert Feuerzeig votes for: 1,153,025 votes withheld: 66,603
David Malizia votes for: 1,154,425 votes withheld: 65,203
Pierre Simard votes for: 1,154,425 votes withheld: 65,203
There were no broker non-votes cast with respect to this proposal.
(ii) The ratification of an amendment to the Company's Certificate of
Incorporation increasing the number of shares of common stock that the
Company is authorized to issue from 10 million to 20 million shares:
For: 1,122,851
Against: 95,479
Abstain: 1,298
There were no broker non-votes cast with respect to this proposal.
(iii) The ratification of the appointment of Grant Thornton LLP as the
Company's independent certified public accountants for the fiscal year
ending February 28, 2001.
For: 1,197,527
Against: 300
Abstain: 2,120
Broker non-votes: 19,681
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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 August 31, 2000.
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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: October 13, 2000 By: /s/ Lewis Gould
-----------------------------------------
Lewis Gould, Chairman, Chief Executive
Officer and Director (Principal Executive
Officer)
Dated: October 13, 2000 By: /s/ Marc P. 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
---------------
*1 Filed electronically pursuant to Item 401 of Regulation S-T.
18
