Securities and Exchange Commission
Washington D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: November 30, 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 January 11, 2002: 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
November 30, 2001 (Unaudited) and February 28, 2001 *................ 3
Consolidated Statements of Income (Unaudited)
For the Nine and Three Months Ended November 30, 2001 and 2000....... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended November 30, 2001 and 2000................. 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 6 - Exhibits and Reports on Form 8-K........................................ 15
Signatures....................................................................... 16
* 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
November 30, 2001 February 28, 2001
----------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $ 342,867 $ 397,817
Accounts receivable, less allowance for doubtful accounts of $461,000
and $662,000 at November 30, 2001 and February 28, 2001, respectively...... 17,073,199 17,576,040
Notes receivable............................................................. 21,844 21,845
Inventories.................................................................. 20,380,291 20,132,585
Prepaid expenses............................................................. 1,361,493 1,582,627
Deferred income taxes........................................................ 582,107 582,107
------------- --------------
Total current assets....................................................... 39,761,801 40,293,021
Property and equipment, net....................................................... 6,523,064 7,155,327
Deferred income taxes............................................................. 582,517 1,019,095
Intangible assets, net............................................................ 14,979,674 15,366,260
Notes receivable.................................................................. 29,469 33,886
Other assets...................................................................... 134,545 168,165
------------- --------------
Total assets...................................................................... $ 62,011,070 $ 64,035,754
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit.............................................................. $ 16,578,511 $ 15,484,622
Acquisition notes payable.................................................... 932,500 932,500
Current maturities of long-term debt......................................... 2,032,859 2,016,385
Accounts payable............................................................. 8,456,090 8,947,842
Accrued liabilities.......................................................... 1,671,271 3,123,469
------------- --------------
Total current liabilities.................................................. 29,671,231 30,504,818
Notes payable................................................................ 3,453,817 5,120,566
Acquisition notes payable.................................................... 1,080,000 1,620,000
Subordinated long term debt.................................................. 3,917,708 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 November 30, 2001 and February 28, 2001,
respectively............................................................... 336,660 336,660
Common stock, 20,000,000 shares authorized, $.001 par value; 3,381,190
shares issued and outstanding at November 30, 2001 and February 28, 2001,
respectively............................................................... 3,381 3,381
Additional paid-in capital................................................... 9,068,703 9,082,087
Retained earnings............................................................ 15,291,529 13,758,547
Cost of stock held in treasury............................................... (350,993) (350,993)
Accumulated other comprehensive income....................................... (1,288,587) (716,933)
------------- --------------
$ 23,060,693 $ 22,112,749
------------- --------------
Total liabilities and shareholders' equity........................................ $ 62,011,070 $ 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 NINE MONTHS AND THREE MONTHS ENDED NOVEMBER 30, 2001 AND 2000
(UNAUDITED)
Nine Months Ended Three Months Ended
November 30, November 30,
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Net Sales $ 82,799,415 86,047,494 $ 26,645,951 26,306,248
Cost of goods sold.............................................. 54,992,347 59,263,810 17,748,007 18,700,293
------------ ------------ ------------ ------------
Gross profit............................................... 27,807,068 26,783,684 8,897,944 7,605,955
------------ ------------ ------------ ------------
Costs and expenses
Shipping................................................... 7,226,292 7,206,504 2,383,997 2,489,134
General and administrative................................. 7,608,567 7,562,038 2,490,303 2,517,373
Selling and marketing...................................... 8,884,184 8,456,013 2,905,733 2,827,165
Restructuring charge....................................... --- 637,462 -- 637,462
Other (income) expense, net................................ (220,774) (87,532) 1,101 (41,435)
------------ ------------ ------------ ------------
23,498,269 23,774,485 7,781,134 8,429,699
------------ ------------ ------------ ------------
Operating income (loss)......................................... 4,308,799 3,009,199 1,116,810 (823,744)
Interest income................................................. 9,615 60,989 9,192 17,576
Interest expense................................................ (1,812,565) (1,453,035) (579,324) (481,044)
------------ ------------ ------------ ------------
Income (loss) before provision for (benefit from) income taxes 2,505,849 1,617,153 546,678 (1,287,212)
Provision for (benefit from) income taxes....................... 954,124 616,064 208,250 (490,427)
------------ ------------ ------------ ------------
Net Income(loss)................................................ $ 1,551,725 $ 1,001,089 $ 338,428 $ (796,785)
============ ============ ============ ============
Basic and diluted net income (loss) per common share: $ 0.46 $ 0.29 $ 0.10 $ (0.24)
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 NINE MONTHS ENDED NOVEMBER 30, 2001 AND 2000
(UNAUDITED)
Nine Months Ended
November 30, 2001 November 30, 2000
----------------- -----------------
Cash flows from operating activities:
Net income .................................................................. $ 1,551,725 $ 1,001,089
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of equipment ................................................... -- (80,530)
Depreciation and amortization ............................................... 1,541,457 1,532,277
Provision for doubtful accounts ............................................. 104,000 76,881
Deferred income taxes ....................................................... 436,580 564,473
Changes in assets and liabilities, net of acquisitions
Accounts receivable ....................................................... 398,841 946,731
Inventories ............................................................... (247,706) (2,551,738)
Prepaid expenses .......................................................... 221,134 371,945
Other assets .............................................................. (80,897) (617,194)
Accounts payable and accrued liabilities .................................. (1,943,950) 482,355
----------- -----------
Net cash provided by operating activities ................................. 1,981,184 1,726,289
----------- -----------
Cash flows from investing activities
Capital expenditures ...................................................... (285,940) (1,564,285)
Purchase of license agreement ............................................. -- (200,000)
Proceeds from sale of fixed assets ........................................ -- 150,000
Acquisitions, net of cash acquired ........................................ -- (1,116,517)
----------- -----------
Net cash used in investing activities ..................................... (285,940) (2,730,802)
----------- -----------
Cash flows from financing activities:
Net borrowings under lines of credit ...................................... 1,093,889 4,516,175
Borrowings of long-term debt .............................................. 6,000,000 --
Repayments of long-term debt .............................................. (7,704,718) (1,023,235)
Repayments of acquisition notes payable ................................... (540,000) (2,070,343)
Proceeds from exercise of stock options ................................... -- 136,008
Purchase of treasury stock ................................................ -- (241,365)
Payments received on notes receivable ..................................... 4,418 346,515
Purchase of common stock warrants ......................................... (13,175) --
Dividends ................................................................. (18,952) (11,770)
----------- -----------
Net cash (used in) provided by financing activities ....................... (1,178,538) 1,651,985
----------- -----------
Cumulative currency translation adjustment ....................................... (571,656) (259,763)
Net (decrease) increase in cash .................................................. (54,950) 387,709
Cash and cash equivalents at beginning of period ................................. 397,817 829,063
----------- -----------
Cash and cash equivalents at end of period ....................................... $ 342,867 $ 1,216,772
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ............................................................. $ 1,908,140 $ 1,613,796
Income taxes paid ......................................................... $ 665,915 $ 1,708,797
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 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 nine
and three months ended November 30, 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:
November 30, 2001 February 28, 2001
----------------- -----------------
Raw materials and work-in-process......... $ 3,993,908 $ 4,957,226
Finished goods............................ 16,386,383 15,175,359
------------ ------------
$ 20,380,291 $ 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 accumulated during the period, by the
weighted average number of shares of common and dilutive common stock equivalent
shares outstanding during each period. Diluted common stock equivalent shares
consist of stock options and warrant common stock equivalent shares which are
not used when the effect is antidilutive.
For the nine months and three months ended November 30, 2001, the
weighted average number of basic shares of common stock outstanding amounted to
3,381,190. For the nine months and the three months ended November 30, 2000, the
weighted average number of basic shares of common stock outstanding amounted to
3,367,458 and 3,373,092, respectively. For the nine months ended November 30,
2001 and November 30, 2000, the weighted average number of diluted shares of
common stock outstanding amounted to 3,386,819 and 3,395,885, respectively. For
the three months ended November 30, 2001 and November 30, 2000, the weighted
average number of diluted shares of common stock outstanding amounted to
3,393,212 and 3,393,021, respectively.
6
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. 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 nine months ended November 30, 2001 and 2000, the Company's
comprehensive income totaled $980,071 and $741,326, respectively. For the three
months ended November 30, 2001 and 2000, the Company's comprehensive income
(loss) totaled $16,211 and ($1,020,392), respectively.
Note 5. License Agreement
-----------------
Effective May 15, 2000, the Company entered into an agreement to
license the distribution rights of its tackless carpet strip product to U.S.
flooring products distributors. Under the terms of the agreement, the Company
will receive a total of $2,750,000 at a predetermined rate based on cartons of
tack strip sold by the licensee. The Company is guaranteed to receive a minimum
of $400,000 per year. In addition, the Company will retain the right and will
continue to sell tackless carpet strip to the home center and international
markets. Sales for the nine months ended November 30, 2000 of tackless carpet
strip to U.S. flooring distributors were approximately $2,925,000. These sales
occurred predominantly in the first three months of the fiscal year. There were
no sales of this product to these distributors for the three and nine months
ended November 30, 2001.
Note 6. Non-cash Investing and Financing Activities
-------------------------------------------
During the nine months ended November 30, 2000, the Company made
several strategic acquisitions. In connection with the acquisitions, liabilities
were assumed as follows:
Fair value of assets acquired $ 1,630,941
Cash paid 1,116,517
------------
Liabilities assumed $ 514,424
============
Issuance of notes to related sellers $ 1,965,700
============
Note 7. 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.
7
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7. Debt Refinancing (continued)
----------------------------
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%. During the
third quarter of fiscal 2002, the Company amended its revolving credit and term
loan facility with its financial institution which, among other things, removed
the partial personal guarantee of the Company's Chairman and Chief Executive
Officer from the April 2001 agreement.
Note 8. Future Effects of Recently Issued Accounting Pronouncements
-----------------------------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) 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 believes that there will be an effect on the amount it
currently has recorded as Intangible assets as they relate to the Company's
Latin American and European operations. The impact on the Company's financial
statements, upon adoption of SFAS No. 141 and 142, has yet to be determined.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long Lived Assets". SFAS No. 144 supercedes SFAS No.
121 "Accounting for the Impairment of Long Lived assets and for Long Lived
Assets to be Disposed Of". SFAS 144 retains substantially all of the
requirements of SFAS 121 while resolving certain implementation issues. SFAS 144
is effective for fiscal years beginning after December 15, 2001 with earlier
implementation encouraged. The Company is currently evaluating the impact on its
financial statements of adopting SFAS 144.
Note 9. Reclassifications
-----------------
Certain amounts in the fiscal 2001 presentation have been reclassified
to conform to the fiscal 2002 presentation.
8
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 November 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, contained primarily in this Item
2, include statements relating to the Company's anticipated revenues from its
distribution agreement for tackless carpet strip 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 assumptions 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,
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
Nine months ended November 30, 2001 compared to nine months ended
November 30, 2000
Net sales for the nine months ended November 30, 2001 were
approximately $82,799,000 compared to approximately $86,047,000 for the nine
months ended November 30, 2000, a decrease of $3,248,000 or 3.8%. Net sales for
the current year were negatively impacted by the licensing of the Company's
domestic distributor tack strip business which accounted for sales of
approximately $2,925,000 in the prior year. Additionally, the Company
experienced a decline in its domestic and international distribution business.
These negative impacts were partially offset by an increase in the Company's
home center retailer customer base resulting from new product introduction into
existing stores and an increase in the number of home center stores operated by
these customers. Selling prices remained relatively stable during the period.
Gross profit for the fiscal 2002 period was approximately $27,807,000
compared to $26,784,000 for the fiscal 2001 period, an increase of $1,023,000 or
3.8%. As a percentage of net sales, gross profit increased to 33.6% in the
fiscal 2002 period from 31.1% in the fiscal 2001 period. This increase is the
result of the negative effect, in the prior year, of a special sales incentive
given to one of the Company's major customers and the Company's decision to exit
the
9
low margin tack strip business. Additionally, the Company has increased its
gross margin through a reduction of certain raw material costs and a change, by
its customers, towards higher margin products.
Shipping expenses for the fiscal 2002 period were approximately
$7,226,000 compared to $7,207,000 for the fiscal 2001 period an increase of
$19,000 or 0.3%. As a percentage of net sales, these expenses increased to 8.7%
in the fiscal 2002 period from 8.4% in the fiscal 2001 period primarily as a
result of certain fixed costs being absorbed by a smaller sales volume as a
result of the licensing of the domestic distributor tack strip business. The
actual increase is a result of the higher sales volume to home center customers
and the initial absorption, by the Company, of a higher percentage of freight
costs to its domestic distributor customers resulting from the licensing of the
tack strip business.
General and administrative expenses for the fiscal 2002 period were
approximately $7,609,000 compared with approximately $7,562,000 for the fiscal
2001 period, an increase of $47,000 or 0.6%. As a percentage of net sales, these
expenses increased to 9.2% in the fiscal 2002 period from 8.8% in the fiscal
2001 period. The actual increase was primarily the result of goodwill
amortization resulting from companies acquired in fiscal 2001, offset in part by
a reduction of expenses at the Company's domestic operations.
Selling and marketing costs for the fiscal 2002 period were
approximately $8,884,000 compared to $8,456,000 for the fiscal 2001 period, an
increase of $428,000 or 5.1%. As a percentage of net sales, these expenses
increased to 10.7% in the fiscal 2002 period from 9.8% in the fiscal 2001
period, principally as a result of the reduced volume attributable to the
licensing of the domestic distributor tack strip business and an increase in
commission rates paid to the Company's sales force. The actual increase is the
result of an increase in commissions and marketing allowances paid resulting
from the increase in sales to home center customers.
During the third quarter of fiscal 2001, the Company finalized its plan
to close its California manufacturing facility and relocate to Nevada.
Additionally, the Company initiated a downsizing of its Holland subsidiary to
reduce costs. In connection with these decisions, the Company recorded a
restructuring charge of approximately $637,000 in the fiscal 2001 period.
Interest income for the fiscal 2002 period was approximately $10,000
compared to $61,000 in the fiscal 2001 period. Interest expense for the fiscal
2002 period was approximately $1,813,000 compared to approximately $1,453,000 in
the fiscal 2001 period. Interest expense increased primarily as a result of an
increase in short-term borrowings to fund working capital and an increase in the
borrowing rate applied to the Company's debt. This was partially offset by a
reduction of long-term debt.
Provision for income taxes was approximately $954,000 in the fiscal
2002 period compared to approximately $616,000 in the fiscal 2001 period, an
increase of $338,000 or 54.9%. The effective tax rate was approximately 38.1%
for the fiscal 2002 and fiscal 2001 periods. The estimated tax rate is based
upon the most recent effective tax rates available.
As a result of the above, net income for the fiscal 2002 period
increased to $1,552,000 from $1,001,000 in the fiscal 2001 period, an increase
of $551,000 or 55.0%. Further, net income as a percentage of net sales increased
to 1.9% in fiscal 2002 compared to 1.2% in fiscal 2001.
Three months ended November 30, 2001 compared to three months
ended November 30, 2000.
Net sales for the three months ended November 30, 2001 were
approximately $26,646,000 compared to approximately $26,306,000 for the three
months ended November 30, 2000, an increase of $340,000 or 1.3%. The increase is
primarily the result of an increase in sales to the Company's home center
customer base. In addition, sales in the prior year were negatively impacted by
a special incentive given by the Company to one of its major customers. This
increase was partially offset by a decrease in the Company's distribution
business both domestically and internationally. Selling prices remained
relatively stable during the period.
Gross profit for the fiscal 2002 quarter was approximately $8,898,000
compared to approximately $7,606,000 in the fiscal 2001 quarter, an increase of
$1,292,000 or 17.0%. As a percentage of net sales, gross profit increased from
10
28.9% in the fiscal 2001 quarter to 33.4% in the fiscal 2002 quarter, primarily
due to the negative impact on the prior year period of the previously mentioned
sales incentive. In addition, the current year was favorably impacted by a
reduction in certain raw material costs and a change in the Company's domestic
product mix towards higher margin products.
Shipping expenses for the fiscal 2002 quarter were approximately
$2,384,000 compared to approximately $2,489,000 for the fiscal 2001 quarter, a
decrease of $105,000 or 4.2%. As a percentage of net sales, these expenses
decreased to 8.9% in the fiscal 2002 quarter from 9.5% in the fiscal 2001
quarter primarily due to a change in the Company's freight policy for certain
domestic distributor customers and certain fixed costs being spread over higher
sales. The actual decrease was the result of a reduction of certain fixed costs.
General and administrative expenses for the fiscal 2002 quarter were
approximately $2,490,000 compared to approximately $2,517,000 for the fiscal
2001 quarter, a decrease of $27,000 or 1.1%. As a percentage of net sales,
general and administrative expenses decreased to 9.3% in the fiscal 2002 quarter
from 9.6% in the fiscal 2001 quarter, primarily as a result of fixed costs being
spread over an increased sales volume. The actual decrease is primarily the
result of the elimination of expenses incurred in the prior year as a result of
the Company's decision to relocate its California facility to Nevada.
Selling and marketing costs for the fiscal 2002 quarter were
approximately $2,906,000 compared to approximately $2,827,000 for the fiscal
2001 quarter, an increase of $79,000 or 2.8%. As a percentage of net sales,
these expenses increased to 10.9% in the fiscal 2002 quarter from 10.7% in the
fiscal 2001 quarter. The percentage increase is primarily a result of an
increase in marketing allowances granted to the Company's home center customer
base. The actual increase is a result of the increased sales volume to these
customers.
During the third quarter of fiscal 2001, the Company finalized its plan
to close its California manufacturing facility and relocate to Nevada.
Additionally, the Company initiated a downsizing of its Holland subsidiary to
reduce costs. In connection with these decisions, the Company recorded a
restructuring charge of approximately $637,000 in the fiscal 2001 quarter.
Interest income for the fiscal 2002 quarter was approximately $9,000
compared to $18,000 for the fiscal 2001 quarter. Interest expense for the fiscal
2002 quarter was approximately $579,000 compared to approximately $481,000 in
the fiscal 2001 quarter. Interest expense increased as a result of an increase
in short-term borrowings to fund working capital needs and an increase in the
borrowing rate applicable to the Company's debt.
Provision for income taxes was approximately $208,000 in the fiscal
2002 period compared to an income tax benefit of approximately $490,000 in the
fiscal 2001 quarter, an increase of approximately $698,000. The effective tax
rate was approximately 38.1% for the fiscal 2002 and 2001 quarters. The
estimated tax rate is based upon the most recent tax rates available.
As a result of the above, net income for the fiscal 2002 quarter was
approximately $338,000 compared to a net loss of approximately $797,000 for the
fiscal 2001 quarter. As a percentage of net sales, the net loss was 3.0% in the
fiscal 2001 quarter compared to a net income of 1.3% in the fiscal 2002 quarter.
Liquidity and Capital Resources
Working capital as of November 30, 2001 increased from approximately
$9,788,000 at February 28, 2001 to $10,091,000, an increase of $303,000,
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 fiscal 2002 period
was approximately $1,981,000 compared to approximately $1,726,000 for the
comparable fiscal 2001 period. The increase is primarily due to an increase in
the
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Company's income from operations. Net cash used in investing activities was
approximately $286,000 compared to approximately $2,731,000 for the comparable
fiscal 2001 period. The change is primarily due to a decrease in capital
expenditures of approximately $1,100,000 and approximately $1,300,000 that was
used in the prior year for certain acquisitions that did not take place in the
current year.
For the fiscal 2002 period, cash used in financing activities was
approximately $1,179,000 compared to cash provided by financing activities of
approximately $1,652,000 for the comparable fiscal 2001 period. Cash used in the
current year was primarily the result of payments of certain subordinated, term
and acquisition debt amounting to approximately $8,200,000 offset by new
long-term borrowings of $6,000,000 and an increase in the Company's line of
credit facility to fund working capital needs. Cash provided in the prior year
was principally the result of an increase in short-term borrowings to fund
certain acquisitions.
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 ratio of 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 prohibit the payment of dividends, except with the lender's
consent. As of November 30, 2001, interest was at LIBOR (4.11% at November 30,
2001) plus 2.00%. At November 30, 2001, the Company had $1,396,000 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%. During the third quarter of fiscal 2002,
the Company amended its revolving credit and term loan facility with the lender
which, among other things, released the partial personal guarantee of the
Company's Chairman and Chief Executive Officer from the April 2001 agreement.
The Company's Chilean subsidiary has a revolving credit facility with a
financial institution which permits borrowings of up to $100,000 with interest
at 18% per year. The facility is secured by a standby letter of credit given by
the Company. This facility expires on April 30, 2002 and, at November 30, 2001,
the Chilean subsidiary had approximately $26,500 available for future borrowings
under this credit facility. The Company's Australian subsidiary has an overdraft
facility which allows it to borrow against a certain percentage of inventory and
receivables. At November 30, 2001 the maximum permitted borrowing was
approximately $363,000 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, which bore interest at 8%, matured and were paid in April 2001. 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 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 non-interest bearing and were paid in the second quarter of
fiscal 2001. 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
November 30, 2001 is $300,000. The fourth note, in the principal amount of
$825,000, is payable in installments: $312,500 was paid in December 2000,
$312,500 originally due in December 2001 was paid $125,000 in December 2001 and
$200,000 over a ten month period beginning January 2002; $200,000 in December
2003, with interest payable each date of $12,500,
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$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.
In October, 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 loan
for the balance from a Canadian lending institution of approximately $670,000
payable over 10 years at an interest rate, to be set annually (6.1% as of
January 1, 2002).
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 a similar arrangement 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 nine and three months ended November 30, 2001, the Company increased
interest expense by approximately $76,000 and $59,000, respectively as a result
of the interest rate swap agreements that were in place during that period. The
interest rate swap agreement expired in December 2001 and was not renewed.
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.
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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 a similar arrangement 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 nine and three months ended November 30, 2001, the Company increased
interest expense by approximately $76,000 and $59,000, respectively as a result
of the interest rate swap agreements that were in place during that period. The
interest rate swap agreement expired in December 2001 and was not renewed.
The Company averaged approximately $10,815,000 and $11,679,000 of debt
not covered by the interest rate swap agreements during the nine and three
months ended November 30, 2001, respectively. If interest rates would have
increased by 10%, the effect on the Company would have been an increase in
interest expense of approximately $41,000 and $15,000, respectively.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
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 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 November 30, 2001.
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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: January 11, 2002 By: /s/ Lewis Gould
----------------------------------------
Lewis Gould, Chairman, Chief Executive
Officer and Director (Principal
Executive Officer)
Dated: January 11, 2002 By: /s/ Marc P. Applebaum
----------------------------------------
Marc P. Applebaum, Senior Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
16