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, 2001
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 12, 2001: 3,381,190 shares of common stock, par
value $.001 per share.
Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
August 31, 2001 (Unaudited) and February 28, 2001*......................................... 3
Consolidated Statements of Income (Unaudited)
For the Six and Three Months Ended August 31, 2001 and 2000................................ 4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended August 31, 2001 and 2000.......................................... 5
Notes to Consolidated Financial Statements........................................................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.... 10
Item 3 - Qualitative and Quantitative Disclosures about Market Risk............................... 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................................................ 16
Item 4 - Submission of Matters to a Vote of Security Holders...................................... 16
Item 6 - Exhibits and Reports on Form 8-K......................................................... 17
Signatures........................................................................................ 18
* The February 28, 2001 balance sheet was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2001 AND FEBRUARY 28, 2001
August 31, 2001 February 28, 2001
-------------------- -------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................... $ 212,122 $ 397,817
Accounts receivable, less allowance for doubtful accounts of $420,000 and
$662,000 at August 31, 2001 and February 28, 2001, respectively.................... 16,664,701 17,576,040
Notes receivable.................................................................... 21,844 21,845
Inventories......................................................................... 22,497,614 20,132,585
Prepaid expenses.................................................................... 1,389,897 1,582,627
Deferred Income Taxes............................................................... 582,107 582,107
----------- -----------
Total current assets............................................................... 41,368,285 40,293,021
Property and equipment, net.......................................................... 6,681,986 7,155,327
Deferred income taxes................................................................ 728,041 1,019,095
Intangible assets, net............................................................... 15,363,763 15,366,260
Notes receivable..................................................................... 30,794 33,886
Other assets......................................................................... 179,419 168,165
----------- -----------
TOTAL ASSETS......................................................................... $64,352,288 $64,035,754
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit..................................................................... $16,449,478 $15,484,622
Acquisition notes payable........................................................... 932,500 932,500
Current maturities of long term debt................................................ 2,073,442 2,016,385
Accounts payable.................................................................... 9,552,879 8,947,842
Accrued liabilities................................................................. 2,160,344 3,123,469
----------- -----------
Total current liabilities.......................................................... 31,168,643 30,504,818
Notes payable........................................................................ 3,953,336 5,120,566
Acquisition notes payable............................................................ 1,460,000 1,620,000
Subordinated long term debt.......................................................... 3,890,625 4,500,000
Deferred income taxes................................................................ 177,621 177,621
Warrant put liability................................................................ 650,000 ---
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, 2001 and February 28, 2001.................... 336,660 336,660
Common stock, 20,000,000 shares authorized, $.001 par value; 3,381,190 shares
issued and outstanding at August 31, 2001 and February 28, 2001.................... 3,381 3,381
Additional paid-in capital.......................................................... 9,068,703 9,082,087
Retained earnings................................................................... 14,960,682 13,758,547
Cost of stock held in treasury...................................................... (350,993) (350,993)
Accumulated other comprehensive income.............................................. (966,370) (716,933)
----------- -----------
$23,052,063 $22,112,749
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $64,352,288 $64,035,754
=========== ===========
The accompanying notes are an integral part of these statements
3
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS AND THREE MONTHS ENDED AUGUST 31, 2001 AND 2000
(UNAUDITED)
Six Months Ended Three Months Ended
---------------- ------------------
August 31, 2001 August 31, 2000 August 31, 2001 August 31, 2000
--------------- --------------- --------------- ---------------
Net Sales..................................... $56,153,464 $59,799,196 $27,267,023 $28,196,214
Cost of goods sold............................ 37,244,340 40,563,517 18,112,995 18,807,894
----------- ----------- ----------- -----------
Gross profit................................ 18,909,124 19,235,679 9,154,028 9,388,320
----------- ----------- ----------- -----------
Costs and expenses
Shipping.................................... 4,842,295 4,775,320 2,333,607 2,403,934
General and administrative.................. 5,118,264 5,044,665 2,425,841 2,343,244
Selling and marketing....................... 5,978,451 5,628,848 2,988,290 2,845,855
Other (income) expense...................... (221,875) (46,097) (169,397) (71,753)
----------- ----------- ----------- -----------
15,717,135 15,402,736 7,578,341 7,521,280
----------- ----------- ----------- -----------
Operating income.............................. 3,191,989 3,832,943 1,575,687 1,867,040
Interest income............................... 423 43,413 232 11,288
Interest expense.............................. (1,233,241) (971,991) (592,424) (497,149)
----------- ----------- ----------- -----------
Income before provision for income taxes...... 1,959,171 2,904,365 983,495 1,381,179
Provision for income taxes.................... 745,874 1,106,491 374,492 526,150
----------- ----------- ----------- -----------
Net income.................................... $ 1,213,297 $ 1,797,874 $ 609,003 $ 855,029
=========== =========== =========== ===========
Basic and diluted net income per $0.36 $0.53 $0.18 $0.25
common share................................. =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
4
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2001 AND 2000
(UNAUDITED)
Six Months Ended
August 31, 2001 August 31, 2000
--------------- ---------------
Cash flows from operating activities:
Net income..................................................................... $ 1,213,297 $ 1,797,874
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of equipment...................................................... --- (74,421)
Depreciation and amortization.................................................. 1,068,270 984,577
Bad debt expense............................................................... 38,021 50,449
Deferred income taxes.......................................................... 291,054 376,315
Changes in assets and liabilities, net of acquisitions:
Accounts receivable......................................................... 873,318 (140,300)
Inventories................................................................. (2,365,029) (2,076,184)
Prepaid expenses............................................................ 192,730 269,159
Other assets................................................................ (409,993) (768,805)
Accounts payable and accrued liabilities.................................... (358,088) 716,982
----------- -----------
Net cash provided by operating activities................................... 543,580 1,135,646
----------- -----------
Cash flows from investing activities:
Capital expenditures........................................................ (166,242) (566,878)
Purchase of license agreement............................................... --- (200,000)
Acquisitions, net of cash acquired.......................................... --- (1,116,517)
Proceeds from sale of fixed assets.......................................... --- 75,000
----------- -----------
Net cash used in investing activities....................................... (166,242) (1,808,395)
----------- -----------
Cash flow from financing activities:
Net borrowings under lines of credit........................................ 964,856 3,047,629
Borrowings of long term debt................................................ 6,000,000 ---
Repayments of long-term debt................................................ (7,096,999) (671,649)
Repayment of acquisition notes payable...................................... (160,000) (1,690,243)
Payments received on notes receivable....................................... 3,092 257,683
Proceeds from exercise of stock options..................................... --- 63,750
Purchase of treasury stock.................................................. --- (231,189)
Purchase of common stock warrants........................................... (13,173) ---
Dividends................................................................... (11,372) (6,185)
----------- -----------
Net cash (used in) provided by financing activities......................... (313,596) 769,796
----------- -----------
Cumulative currency translation adjustment..................................... (249,437) (36,156)
Net (decrease) increase in cash................................................ (185,695) 60,891
Cash and cash equivalents at beginning of period............................... 397,817 829,063
----------- -----------
Cash and cash equivalents at end of period..................................... $ 212,122 $ 889,954
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid............................................................... $ 1,186,423 $ 834,041
Income taxes paid........................................................... $ 184,915 $ 1,195,473
The accompanying notes are an integral part of these statements.
5
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 28, 2001, of
Q.E.P. Co., Inc. (the "Company") as filed with the Securities and Exchange
Commission. The February 28, 2001 balance sheet was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. The
results of operations for the six and three months ended August 31, 2001 are not
necessarily indicative of the results for the full fiscal year ending February
28, 2002.
Note 2. Inventories
-----------
The major classes of inventories are as follows:
August 31, 2001 February 28, 2001
--------------- -----------------
Raw materials and work-in-process.. $ 4,065,588 $ 4,957,226
Finished goods..................... 18,432,026 15,175,359
----------- -----------
$22,497,614 $20,132,585
=========== ===========
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 the three months ended August 31, 2001, the
weighted average number of basic shares of common stock outstanding amounted to
3,381,190. 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 ended August 31, 2001
and August 31, 2000, the weighted average number of diluted shares of common
stock outstanding amounted to 3,383,259 and 3,404,736, respectively. For the
three months ended August 31, 2001 and August 31, 2000, the weighted average
number of diluted shares of common stock outstanding amounted to 3,384,900 and
3,408,759, respectively.
6
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
that 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 remained 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 $0.09 and $0.13 per
share for the six months ended August 31, 2001 and 2000, respectively, and a
reduction of $0.04 and $0.06 per share for the three months ended August 31,
2001 and 2000, 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, 2001 and 2000, the Company's
comprehensive income totaled $963,860 and $1,761,718, respectively. For the
three months ended August 31, 2001 and 2000, the Company's comprehensive income
totaled $435,863 and $834,223, 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. Sales for the six months ended August
31, 2000 of tackless carpet strip to U.S. flooring products distributors were
approximately $2,910,000. These sales occurred predominantly in the first three
months of the fiscal year.
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
Note 8. Debt Refinancing
----------------
On April 5, 2001, the Company entered into a new $4,500,000
subordinated credit facility with HillStreet Fund LP. This facility bears an
interest rate of 15% and matures on April 5, 2007. Beginning July 1, 2005, the
Company is required to make equal quarterly principal payments through April 5,
2007. The agreement also provides for an additional 3% interest if the Company
does not meet certain financial covenants. In addition, the Company issued to
HillStreet Fund LP 325,000 10-year warrants which have an exercise price of
$3.63 per share (the "Put Warrants"). These Put Warrants can be put to the
Company on and after April 5, 2006 based on criteria set forth in the warrant
agreement. In addition, the Company may call these Put Warrants on and after
April 5, 2007 based on the same criteria. The Company has recorded a liability
for these Put Warrants based on an independent appraisal. Changes to the future
fair value of the Put Warrants will be recorded in accordance with SFAS 133. The
resulting discount of the subordinated credit facility will be amortized over
the life of the debt.
Further, in April 2001, the Company obtained an additional term loan
from its primary lending institution. This loan, in the amount of $1,500,000, is
payable in equal quarterly installments commencing July 1, 2001 and ending on
April 1, 2003. The interest rate for this loan is LIBOR plus 2.75% and the loan
is partially guaranteed by the Chairman and Chief Executive Officer of the
Company.
Note 9. Future Effects of Recently Issued Accounting Pronouncements
-----------------------------------------------------------
In 1998, SFAS No. 133, "Accounting of Derivative Instruments and
Hedging Activities," was issued and in June 2000, SFAS No. 138 was issued, which
amends and clarifies certain guidance in SFAS No. 133. These statements
establish accounting and reporting standards for derivative instruments and must
be adopted no later than fiscal 2002. The statement requires all derivatives to
be recognized as assets or liabilities on the balance sheet and measured at fair
value. Changes in the fair value of derivatives should be recognized in either
net income or other comprehensive income, depending on the designated purpose of
the derivative. The Company implemented SFAS No. 133 in the first quarter of
fiscal 2002 and adoption did not have a significant impact on the Company's
financial position or results of operations.
In September 2000, the Emerging Issues Task Force ("EITF") reached a
final consensus on EITF Issue 00-10, "Accounting for Shipping and Handling
Costs" and the related revenue. The Company adopted EITF 00-10 in fiscal 2001
and classifies all shipping and handling costs as a separate operational
expense.
The EITF issued EITF 00-22, "Accounting for "Points" and Certain Other
Time-Based or Volume-Based Sales Incentive Offers and Offers for Free Products
or Services to Be Delivered in the Future." This guidance requires that
obligations for cash rebates offered to customers who achieve specified
cumulative levels of revenue transactions be recognized as a reduction of
revenue based on a systematic and rational allocation to each of the underlying
revenue transactions that result in plain progress towards the rebate. The EITF
also issued EITF 00-25, "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products."
This issue addresses when consideration from a vendor to a retailer (a) in
connection with the retailer's purchase of the vendor's products or (b) to
promote sales of the vendor's products by the retailer should be classified in
the vendor's income statement as a reduction of revenue. The Company adopted
EITF No. 00-22 and 00-25 in the first quarter of fiscal 2002 and has determined
that it is currently in compliance with the consensuses. Further, such adoption
did not have a significant impact on the Company's financial position or results
of operations.
8
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 is effective for all business combinations initiated after
June 30, 2001, while SFAS No. 142 is effective for all fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the statements. Other intangible
assets will continue to be amortized over their useful lives. The Company is
currently evaluating the effect of these statements on the Company's financial
position and results of operations.
Note 10. Reclassifications
-----------------
Certain amounts in the 2000 presentation have been reclassified to
conform to the 2001 presentation.
9
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 certain 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 similar anticipatory expressions, are generally forward-
looking and are made only as of the date of this report and are not related to
historical results. Such statements contain primarily in this item 2, include
statements relating to the Company's anticipated revenues from its distribution
agreement for tackless carpet strip, performance by the lender in the interest
rate swap agreement signed in December 2000, and the adequacy of the Company's
liquidity sources to meet the Company's working capital needs and anticipated
expenditures. Additionally, the report 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
Company's anticipation of performance by distributors of its tackless carpet
strip, 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
assumption upon which the Company bases its assessments 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 its newly acquired entities, the Company's dependence upon certain
key personnel and its ability to successfully integrate new management personnel
into the Company, the Company's ability to accurately predict the number and
type of employees required to conduct its European operations and the
compensation required to be paid to such personnel, any increase in the level of
current taxes or the imposition of additional taxes in connection with the
Henderson, Nevada facility, 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, 2001 compared to six months ended August 31,
2000
Net sales for the six months ended August 31, 2001 were approximately
$56,153,000 compared to approximately $59,799,000 for the six months ended
August 31, 2000, a decrease of $3,646,000 or 6.1%. This decrease includes the
effect of the license of the Company's distributor tack strip business. Sales of
tack strip during the comparable fiscal 2001 period that the license agreement
was in effect were $2,910,000. The Company has also experienced a decline in its
distribution business both domestically and internationally. This negative
impact was offset by an increase in sales to home center retailers, principally
as a result of new
10
store openings and new product introduction to existing stores. Selling prices
remained relatively stable during the period.
Gross profit for the fiscal 2002 period was approximately $18,909,000
compared to $19,236,000 for the fiscal 2001 period, a decrease of $327,000 or
1.7%. As a percentage of net sales, gross profit increased to 33.7% in the
fiscal 2002 period from 32.2% in the fiscal 2001 period. This increase was
primarily the result of a change in the Company's domestic product mix towards
higher margin products and the discontinuance of the sale to domestic
distributors of the low margin tack strip business.
Shipping expenses for the fiscal 2002 period were approximately
$4,842,000 compared to $4,775,000 for the fiscal 2001 period, an increase of
$67,000 or 1.4%. As a percentage of net sales, these expenses increased to 8.6%
in the fiscal 2002 period from 8.0% in the fiscal 2001 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 an
absorption, by the Company, of a higher percentage of freight costs to its
domestic distributors.
General and administrative expenses for the fiscal 2002 period were
approximately $5,118,000 compared with approximately $5,045,000 for the fiscal
2001 period, an increase of $73,000 or 1.5%. As a percentage of net sales,
these expenses increased to 9.1% in the fiscal 2002 period from 8.4% for the
fiscal 2001 period. The actual increase was the result of goodwill amortization
resulting from companies acquired in fiscal 2000, partially offset by a
reduction of expenses at the Company's domestic divisions.
Selling and marketing costs for the fiscal 2002 period were
approximately $5,978,000 compared to $5,629,000 for the fiscal 2001 period, an
increase of $349,000 or 6.2%. As a percentage of net sales, these expenses
increased to 10.6% in the fiscal 2002 period from 9.4% in the fiscal 2001
period, principally due to a reduced sales volume after the licensing of the
tack strip business and an increase in marketing allowance rates to one of the
Company's major customers. 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 the amortization of certain allowance costs
given to a major customer of the Company.
Interest income for the fiscal 2002 period was approximately $423
compared to $43,000 in the fiscal 2001 period. Interest expense for the fiscal
2002 period was approximately $1,233,000 compared to approximately $972,000 in
the fiscal 2001 period. Interest expense increased as a result of an increase
in borrowings under the Company's line of credit facilities to fund working
capital needs together with an increase in the borrowing rate applied to the
Company's debt offset in part by a reduction of long-term debt.
Provision for income taxes was approximately $746,000 in the fiscal
2002 period compared to approximately $1,106,000 in the fiscal 2001 period, a
decrease of $360,000 or 32.5%. The effective tax rate was approximately 38.1%
for the fiscal 2002 and fiscal 2001 periods. The estimated effective tax rate
is based upon the most recent effective tax rates available.
As a result of the above, net income for the fiscal 2002 period
decreased to $1,213,000 from $1,798,000 in the fiscal 2001 period, a decrease of
$585,000 or 32.5%. Net income as a percentage of net sales decreased to 2.2% in
the fiscal 2002 period compared to 3.0% in the fiscal 2001 period.
Three months ended August 31, 2001 compared to three months ended August 31,
2000.
11
Net sales for the three months ended August 31, 2001 were
approximately $27,267,000 compared to approximately $28,196,000 for the three
months ended August 31, 2000, a decrease of $929,000 or 3.3%. This decrease is
primarily a result of a decrease in the Company's distribution business both
domestically and internationally offset by an increase in the sales to Home
Center customers.
Gross profit for the fiscal 2002 period was approximately $9,154,000
compared to approximately $9,388,000 in the fiscal 2001 period, a decrease of
$234,000 or 2.5%. As a percentage of net sales, gross profit increased from
33.3% in the fiscal 2001 period to 33.6% in the fiscal 2002 period due to a
change in the Company's domestic product mix towards higher margin products and
a reduction in certain raw material costs.
Shipping expenses for the fiscal 2002 period were approximately
$2,334,000 compared to approximately $2,404,000 for the fiscal 2001 period, a
decrease of $70,000 or 2.9%. As a percentage of net sales, these expenses
increased to 8.6% in the fiscal 2002 period from 8.5% in the fiscal 2001 period
primarily due to a change in the Company's freight policy resulting in increased
costs for certain domestic distributor customers and the Company's fixed
expenses being spread over lower sales. The actual decrease was primarily caused
by the decrease in sales volume.
General and administrative expenses for the fiscal 2002 period were
approximately $2,426,000 compared to approximately $2,343,000 for the fiscal
2001 period, an increase of $83,000 or 3.5%. As a percentage of net sales,
general and administrative expenses increased from 8.3% in the fiscal 2001
period to 8.9% in the fiscal 2002 period, reflecting the absorption of fixed
costs over a lower sales volume. The actual increase was primarily the result
of goodwill amortization resulting from prior acquisitions.
Selling and marketing costs for the fiscal 2002 period were
approximately $2,988,000 compared to approximately $2,846,000 for the fiscal
2001 period, an increase of $142,000 or 5.0%. As a percentage of net sales,
these expenses increased to 10.9% in the fiscal 2002 period from 10.1% in the
fiscal 2001 period. The percentage increase is primarily the result of
increased costs being spread over a reduced sales volume and an increase in
marketing allowances granted to a major customer. The actual increase is a
result of an increase in commissions and allowances resulting from higher sales
to the Company's Home Center customers and an amortization of certain marketing
allowances.
Interest income for the fiscal 2002 period was approximately $232
compared to approximately $11,000 in the fiscal 2001 period. Interest expense
for the fiscal 2002 period was approximately $592,000 compared to approximately
$497,000 in the fiscal 2001 period. Interest expense increased as a result of
the increase in borrowings under the Company's line of credit facilities and an
increase in borrowing rates applied to the Company's debt.
Provision for income taxes was approximately $374,000 in the fiscal
2002 period compared to approximately $526,000 for the fiscal 2001 period, a
decrease of $152,000 or 28.9%. The estimated tax rate was approximately 38.1%
for the fiscal 2002 and fiscal 2001 periods. The estimated effective tax rate
is based upon the most recent effective tax rates available.
As a result of the above, net income for the fiscal 2002 period was
approximately $609,000 compared to approximately $855,000 for the fiscal 2001
period, a decrease of $246,000 or 28.8%. Net income as a percentage of net
sales decreased to 2.2% in the fiscal 2002 period compared to 3.0% in the fiscal
2001 period.
12
Liquidity and Capital Resources
Working capital as of August 31, 2001 increased from approximately
$9,788,000 at February 28, 2001 to $10,200,000, an increase of $412,000,
primarily as a result of an increase in the Company's income from operations.
Any cash in excess of anticipated requirements is invested in commercial paper
or overnight repurchase agreements with a financial institution. The Company
states the value of such investments at market price and classifies them as cash
equivalents on its balance sheet.
Net cash provided by operating activities during the six month period
ended August 31, 2001 was $544,000 compared to $1,136,000 for the comparable
period in fiscal 2001. The decrease in cash provided by operating activities
was primarily the result of a decrease in income from operations and an increase
in inventory. Net cash used in investing activities was $166,000 compared to
$1,808,000 for the comparable period in fiscal 2001. The decrease is primarily
due to the cash used to purchase the newly acquired entities in fiscal 2001.
Net cash used in financing activities was $314,000 in fiscal 2002
compared to cash provided of $770,000 in the comparable period in fiscal 2001.
The change is due primarily to an increase in short term borrowings to fund
working capital needs, offset by repayments of the Company's revolving credit
and term loan facility, acquisition debt and subordinated debt.
The Company has a revolving credit and term loan facility agreement with a
United States financial institution. This agreement, which was amended on April
5, 2001, provides for borrowings of up to $18,000,000 based upon a fixed
percentage of eligible accounts receivable and inventory. Interest is payable
based on a sliding scale depending on the Company's senior debt to EBITDA
ranging from LIBOR plus 1.75% to LIBOR plus 2.5%. This facility terminates in
July 2003 and is collateralized by substantially all of the Company's assets.
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 prohibits the
payment of dividends, except with the lender's consent. Prior to this amendment
the Company was allowed to borrow up to $16,500,000 based on the same fixed
percentage of eligible accounts receivable and inventory. Interest was charged
on a sliding scale. As of August 31, 2001, interest was at LIBOR (3.58 at August
31, 2001) plus 2.00%. At August 31, 2001, the Company had $1,431,000 available
for future borrowings under its existing facilities. Further, in April 2001, the
Company obtained an additional term loan from its primary lending institution.
This loan, in the amount of $1,500,000, is payable in equal quarterly
installments commencing July 1, 2001 and ending on April 1, 2003. The interest
rate for this loan is LIBOR plus 2.75% and the loan is partially guaranteed by
the Chairman and Chief Executive Officer of the Company.
The Company's Chilean subsidiary has a revolving credit facility with
a financial institution which permits borrowings of up to $50,000 with interest
at 18% per year. The facility is secured by a standby letter of credit given by
the Company. This facility expires on November 30, 2001. At August 31, 2001 the
Chilean subsidiary had approximately $16,000 available for future borrowings
under the credit facility. The Company's Australian subsidiary also has an
overdraft facility which allows it to borrow against a certain percentage of
inventory and receivables. At August 31, 2001 the maximum permitted borrowing
was approximately $300,000 and was fully utilized.
In connection with the acquisition of Roberts Consolidated Industries,
Inc., the Company issued $7,500,000 of subordinated debentures. These debentures
matured and were paid in April 2001 and bore 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 was amortized over the life of the debentures. On April 5, 2001 the
Company entered into a new $4,500,000 subordinated credit facility with
HillStreet Fund LP. This facility bears an interest rate of 15% and matures in
six years. Equal quarterly payments are required beginning in year five. The
agreement also provides for an additional 3% interest if the Company does not
meet certain financial covenants. In connection with the financing, the Company
issued 325,000 10-year warrants which have an exercise price of $3.63 per share.
These warrants can be put to the Company
13
after the fifth year based on criteria set forth in the warrant agreement. In
addition, the Company may call these warrants after the sixth year based on the
same criteria.
In connection with certain acquisitions, the Company issued five notes to
the respective sellers. Two of the notes, aggregating approximately $1,260,000,
were paid in the second quarter of fiscal 2001 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 amount outstanding on this note at August 31,
2001 is $600,000. 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. 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.
On December 23, 2000, the Company entered into an interest rate swap
agreement with its primary lender. The interest rate swap agreement hedges the
Company's exposure on certain floating rate obligations in the aggregate
principal amount of $10,000,000. The purpose of the interest rate swap is to
convert the Company's floating rate interest obligations to obligations having a
fixed rate of 6.0% per annum for a one-year period. Prior to this interest rate
swap, the Company had one with the same institution that matured in December
2000. The fixing of the interest rates reduces in part the Company's exposure
to the uncertainty of floating interest rates. The differential paid or
received by the Company on the interest rate swap agreement is recognized as an
adjustment to interest expense in the period incurred. For the six and three
months ended August 31, 2001, the Company reduced interest expense by
approximately $29,000 and $18,000, respectively as a result of the interest rate
swap agreements that were in place during that period. The Company is exposed
to credit loss in the event of non-performance by any counter-party to the
interest rate swap agreement. The Company does not anticipate rate non-
performance by such lender, and no material loss would be expected from the non-
performance of the lender.
The Company believes its existing cash balances, internally generated funds
from operations and its available bank lines of credit will provide the
liquidity necessary to satisfy the Company's working capital needs, including
the growth in inventory and accounts receivable balances, and will be adequate
to finance anticipated capital expenditures 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.
14
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
On December 23, 2000, the Company entered into an interest rate swap
agreement with its primary lender. The interest rate swap agreement hedges the
Company's exposure on certain floating rate obligations in the aggregate
principal amount of $10,000,000. The purpose of the interest rate swap is to
convert the Company's floating rate interest obligations to obligations having a
fixed rate of 6.0% per annum for a one-year period. Prior to this interest rate
swap, the Company had one with the same institution that matured in December
2000. The fixing of the interest rates reduces in part the Company's exposure
to the uncertainty of floating interest rates. The differential paid or
received by the Company on the interest rate swap agreement is recognized as an
adjustment to interest expense in the period incurred. For the six and three
months ended August 31, 2001, the Company increased interest expense by
approximately $29,000 and $18,000, respectively as a result of the interest rate
swap agreements that were in place during that period. The Company is exposed
to credit loss in the event of non-performance by any counter-party to the
interest rate swap agreement. The Company does not anticipate rate non-
performance by such lender, and no material loss would be expected from the non-
performance of the lender.
The Company averaged approximately $11,157,000 and $11,428,000 of debt
not covered by the interest rate swap agreements during the six and three months
ended August 31, 2001. If interest rates would have increased by 10%, the
effect on the Company would have been an increase in interest expense of
approximately $36,000 and $19,000, respectively.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In June 2001, the Debtor in Possession for Hechinger Investment Company
of Delaware, Inc. filed a complaint in United States Bankruptcy Court to avoid
and recover preferential transfers of Property under the United States
Bankruptcy Court code. The Company is vigorously contesting this complaint and
does not believe the outcome will have a material adverse effect on the Company.
There have been no other material developments in any litigation
proceedings to which the Company is a party since the Company's report on Form
10-K was filed with the Securities and Exchange Commission on May 29, 2001.
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on July 13,
2001. The following matters were voted upon at the Annual Meeting:
(i) The election of the following eight members to the Company's Board of
Directors:
Leonard Gould votes for: 2,528,863 votes withheld: 58,792
Lewis Gould votes for: 2,528,863 votes withheld: 58,792
Christian Nast votes for: 2,566,901 votes withheld: 20,754
Emil Vogel votes for: 2,566,901 votes withheld: 20,754
Robert Feuerzeig votes for: 2,534,676 votes withheld: 52,979
David Malizia votes for: 2,567,576 votes withheld: 20,079
Pierre Simard votes for: 2,561,951 votes withheld: 25,704
Ernst Ohnell votes for: 2,567,576 votes withheld: 20,079
There were no broker non-votes cast with respect to this proposal.
(ii) The ratification of the appointment of Grant Thornton LLP as the
Company's independent certified public accountants for the fiscal year
ending February 28, 2002.
For: 2,581,630
Against: 4,500
Abstain: 1,525
There were no broker non-votes cast with respect to this proposal.
16
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*
* 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, 2001.
17
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 12, 2001 By: /s/ Lewis Gould
----------------------------------------
Lewis Gould, Chairman, Chief Executive
Officer and Director (Principal
Executive Officer)
Dated: October 12, 2001 By: /s/ Marc P. Applebaum
----------------------------------------
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
18