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 quarterly period ended: May 31, 2002
Commission file number: 0-21161
Q.E.P. CO., INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2983807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1081 Holland Drive
Boca Raton, Florida 33487
(Address of principal executive offices)
(Zip code)
(561) 994-5550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ________
-------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of July 12, 2002: 3,381,190 shares of common stock, par value
$0.001 per share.
1
Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
May 31, 2002 (Unaudited) and February 28, 2002 (Audited) ........................... 3
Consolidated Statements of Income (Unaudited)
For the Three Months Ended May 31, 2002 and 2001 ................................... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended May 31, 2002 and 2001 ................................... 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 ............................... 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ........................................................................ 13
Item 2 - Changes in Securities .................................................................... 13
Item 6 - Exhibits and Reports on Form 8-K ......................................................... 13
Signatures ........................................................................................ 14
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2002 AND FEBRUARY 28, 2002
May 31, 2002 February 28, 2002
------------ -----------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 919,177 $ 435,320
Accounts receivable, less allowance for doubtful accounts
of approximately $315,600 and $422,000 as of May 31, 2002
and February 28, 2002, respectively ..................................... 16,860,737 17,267,501
Notes receivable .......................................................... 21,845 21,845
Inventories ............................................................... 21,285,205 19,878,478
Prepaid expenses .......................................................... 1,568,985 1,798,773
Deferred income taxes ..................................................... 485,770 485,770
------------ ------------
Total current assets .................................................... 41,141,719 39,887,687
Property and equipment, net .................................................... 6,299,784 6,300,022
Deferred income taxes .......................................................... 1,110,588 1,232,031
Intangible assets, net ......................................................... 15,029,117 14,709,988
Notes receivable ............................................................... 28,586 28,586
Other assets ................................................................... 223,093 212,205
------------ ------------
Total Assets ................................................................... $ 63,832,887 $ 62,370,519
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit ........................................................... $ 17,076,168 $ 16,763,214
Current maturities of long term debt ...................................... 2,078,347 2,053,179
Acquisition notes payable ................................................. 727,500 767,500
Accounts payable .......................................................... 8,518,219 8,208,136
Accrued liabilities ....................................................... 2,872,825 2,385,755
------------ ------------
Total current liabilities ............................................... 31,273,059 30,177,784
Notes payable .................................................................. 2,534,991 3,118,629
Acquisition notes payable ...................................................... 920,000 1,000,000
Subordinated long term debt .................................................... 3,971,875 3,944,792
Deferred income taxes .......................................................... 504,740 504,740
Warrant put liability .......................................................... 700,000 575,000
Commitments and contingencies .................................................. --- ---
SHAREHOLDERS' EQUITY
Preferred stock, 2,500,000 shares authorized, $1.00 par value; 336,660
shares issued and outstanding at May 31, 2002 and February 28, 2002 ..... 336,660 336,660
Common stock, 20,000,000 shares authorized, $.001 par value; 3,381,190
shares issued and outstanding at May 31, 2002 and February 28, 2002 ..... 3,381 3,381
Additional paid-in capital ................................................ 9,068,703 9,068,703
Retained earnings ......................................................... 16,550,967 15,842,783
Cost of stock held in treasury ............................................ (390,642) (390,642)
Accumulated other comprehensive income .................................... (1,640,847) (1,811,311)
------------ ------------
$ 23,928,222 $ 23,049,574
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $ 63,832,887 $ 62,370,519
============ ============
The accompanying notes are an integral part of these statements.
3
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MAY 31, 2002 AND 2001
(UNAUDITED)
Three Months Ended
------------------
May 31, 2002 May 31, 2001
------------ ------------
Net Sales .......................................... $31,190,454 $28,886,441
Cost of goods sold ................................. 20,792,353 19,131,345
----------- -----------
Gross profit .................................... 10,398,101 9,755,096
----------- -----------
Costs and expenses
Shipping ........................................ 2,663,262 2,508,688
General and administrative ...................... 2,617,075 2,692,423
Selling and marketing ........................... 3,288,841 2,990,161
Other expense (income) .......................... 115,405 (52,478)
----------- -----------
8,684,583 8,138,794
----------- -----------
Operating income ................................ 1,713,518 1,616,302
Interest income .................................... 641 191
Interest expense ................................... (457,370) (640,817)
----------- -----------
Income before provision for income taxes ........... 1,256,789 975,676
Provision for income taxes ......................... (543,021) (371,382)
----------- -----------
Net income ......................................... $ 713,768 $ 604,294
=========== ===========
Basic and diluted earnings per common share ........ $ 0.21 $ 0.18
=========== ===========
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 THREE MONTHS ENDED MAY 31, 2002 AND 2001
(UNAUDITED)
Three Months Ended
------------------
May 31, 2002 May 31, 2001
------------ ------------
Cash flows from operating activities:
Net income ........................................................................ $ 713,768 $ 604,294
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................................... 445,870 540,246
Change in fair value of warrant put liability ..................................... 125,000 --
Deferred income taxes ............................................................. 121,443 145,527
Bad debt expense .................................................................. 112,158 --
Changes in assets and liabilities:
Accounts receivable ............................................................. 602,405 294,098
Inventories ..................................................................... (1,264,466) (871,903)
Prepaid expenses ................................................................ 242,916 193,950
Other assets .................................................................... (99,290) (192,655)
Accounts payable and accrued liabilities ........................................ 293,662 1,106,129
----------- -----------
Net cash provided by operating activities ....................................... 1,293,466 1,819,686
----------- -----------
Cash flows from investing activities
Capital expenditures .............................................................. (227,730) (33,609)
----------- -----------
Net cash used in investing activities ................................................ (227,730) (33,609)
----------- -----------
Cash flows from financing activities:
Net borrowings (repayment) of lines of credit ..................................... 312,954 (733,108)
Borrowings of long term debt ...................................................... -- 6,000,000
Repayments of long term debt ...................................................... (488,420) (6,580,654)
Repayments of acquisition debt .................................................... (120,000) (80,000)
Payments received on notes receivable ............................................. -- 1,767
Purchase of common stock warrants ................................................. -- (13,175)
Dividends ......................................................................... (5,584) (11,372)
----------- -----------
Net cash used in financing activities ............................................. (301,050) (1,416,542)
----------- -----------
Cumulative currency translation adjustment ........................................... (280,829) (76,297)
----------- -----------
Net increase in cash ................................................................. 483,857 293,238
Cash and cash equivalents at beginning of period ..................................... 435,320 397,817
----------- -----------
Cash and cash equivalents at end of period ........................................... $ 919,177 $ 691,055
=========== ===========
Supplemental disclosure of cash flow information
Interest paid ..................................................................... $ 434,754 $ 585,003
Income taxes paid ................................................................. $ 215,750 $ 20,603
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, 2002, of Q.E.P. Co., Inc. (the
"Company") as filed with the Securities and Exchange Commission. The February
28, 2002 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 three months
ended May 31, 2002 are not necessarily indicative of the results for the full
fiscal year ending February 28, 2003.
Note 2. Inventories
The major classes of inventories are as follows:
May 31, 2002 February 28, 2002
------------ -----------------
Raw materials and work-in process ....... $ 3,764,188 $ 3,837,402
Finished goods .......................... 17,521,017 16,041,076
----------- -----------
$21,285,205 $19,878,478
=========== ===========
Note 3. Earnings per Share
Basic earnings per share is computed by dividing net income, after
deducting preferred stock dividends accumulated during the period, by the
weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share is computed by dividing net income, after
deducting preferred stock dividends accumulated during the period, by the
weighted average number of shares of common and dilutive common stock equivalent
shares outstanding during the period. Diluted common stock equivalent shares
consist of stock options and warrant common stock equivalent shares which are
not utilized when the effect is antidilutive.
For the three months ended May 31, 2002 and 2001 the weighted average
number of basic shares of common stock outstanding amounted to 3,381,190. For
the three months ended May 31, 2002 and 2001, the weighted average number of
diluted shares of common stock outstanding amounted to 3,444,228 and 3,381,618,
respectively.
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. During the first quarter of fiscal 2002 and fiscal 2001,
the Company's comprehensive income totaled $884,232 and $527,997, respectively.
6
Note 5. 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% per annum and matures on April 5, 2007. Beginning July 1, 2005, the Company
is required to make equal quarterly principal payments of $562,500 through April
5, 2007. The agreement also provides for an additional 3% interest if the
Company does not meet certain financial covenants. In connection with the
consummation of this loan transaction, the Company issued warrants to HillStreet
Fund LP to purchase up to 325,000 shares of the Company's common stock at an
exercise price of $3.63 per share (the "Put Warrants"). The Put Warrants are
exercisable until April 5, 2011. 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. Any change to the future fair value
of the Put Warrants is being recognized in earnings of the Company in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The resulting discount of the subordinated credit facility is being
amortized over the life of the debt. For the three months ended May 31, 2002,
the Company recognized an after tax expense of $125,000 as a result of a change
in the future value of the Put Warrants. For the three months ended May 31,
2001, there was no effect on the earnings of the Company pertaining to the Put
Warrants.
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 of $187,500, which commenced on July 1,
2001 and will end on April 1, 2003. The interest rate for this loan is LIBOR
(1.84% at May 31, 2002) plus 2.75%.
Note 6. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, Accounting for Asset Retirement Obligations." SFAS No. 143 provides
accounting and reporting guidance for legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction
or normal operations of long-lived assets. This standard is effective for fiscal
years beginning after June 30, 2002. The Company is currently reviewing the
provisions of this standard and expects that adoption of the standard will not
have a material effect on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This standard is effective for
fiscal years beginning after December 15, 2001 and supersedes SFAS No. 121,
while retaining many of the requirements of such statement. SFAS No. 144 further
defines conditions necessary for assets to be considered held for sale. The
adoption of this standard did not have a material effect on the financial
statements of the Company.
Note 7. Adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 is effective
for all business combinations completed after June 30, 2001. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, certain
provisions of this statement apply to goodwill and other intangible assets
acquired between July 1, 2001 and the effective date of SFAS No. 142. Major
provisions of these statements and their effective dates for the Company are as
follows: (i) all business combinations initiated after June 30, 2001 must use
the purchase method of accounting, and the pooling of interest method of
accounting is prohibited except for transactions initiated before July 1, 2001;
(ii) intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from
7
contractual or other legal rights or are separable from the acquired entity and
can be sold, transferred, licensed, rented or exchanged, either individually or
as part of a related contract, asset or liability; (iii) goodwill, as well as
intangible assets with indefinite lives, acquired after June 30, 2001, will not
be amortized, and effective March 1, 2002, all previously recognized goodwill
and intangible assets with indefinite lives will not be subject to amortization;
(iv) effective March 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an impairment
indicator; and (v) all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. As of March 1, 2002, the
Company stopped amortizing goodwill in accordance with SFAS No. 142. Evaluations
of goodwill under SFAS 142 are currently being performed and management
currently estimates that there will be an impairment of goodwill in the range of
$3,000,000 to $4,000,000 as it relates to the Company's European and South
American subsidiaries. This impairment loss will be recognized in the Company's
fiscal second quarter ending August 31, 2002 financial statements as a
cumulative effect of a change in accounting principle.
As a result of the adoption of SFAS No. 142, the Company did not recognize
goodwill amortization for the quarter ended May 31, 2002. If SFAS No. 142 was in
effect during the comparable quarter ended May 31, 2001, the Company would not
have recognized approximately $115,000 in goodwill amortization; therefore, net
income applicable to common shareholders would have increased to approximately
$708,000 and earnings per share applicable to common shareholders would have
increased by $0.03.
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 3,000 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 through home
improvement retailers, specialty distributors to the hardware, construction,
flooring and home improvement trades, chain or independent hardware, tile and
carpet retailers for use by the do-it-yourself consumer as well as the
construction or remodeling professional and original equipment manufacturers.
Dollar figures set forth below are rounded to the nearest thousand.
A summary of significant accounting policies followed by the Company is set
forth in Note B to the Company's consolidated financial statements in the
Company's Annual Report on Form 10K for the year ended February 28, 2002, which
is incorporated herein by reference.
Forward-Looking Statements
This report contains certain forward-looking statements that 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 include statements relating to
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 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 and South American 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
Three months ended May 31, 2002 compared to three months ended May 31, 2001
Net sales for the three months ended May 31, 2002 (the "fiscal 2003
period") were approximately $31,190,000 compared to $28,886,000 for the three
months ended May 31, 2001 (the "fiscal 2002 period"), an increase of $2,304,000
or 8.0%. This increase is principally the result of an increase in sales to the
home center customer base in North America and Australia offset partially by
declines at the Company's European and South American operations principally as
a result of unfavorable economic conditions. Selling prices remained relatively
stable during the comparable periods.
9
Gross profit for the fiscal 2003 period was approximately $10,398,000
compared to $9,755,000 for the fiscal 2002 period, an increase of $643,000 or
6.6%. As a percentage of net sales, gross profit decreased to 33.3% in the
fiscal 2003 period from 33.8% in the fiscal 2002 period. The increase in gross
profit dollars was a result of the overall increase in the adhesive product line
sales volume to the Company's home center customer base. However, this change in
product mix had the effect of reducing the gross profit percentage. Further, the
Company experienced a decline in gross margin at its foreign subsidiaries.
Shipping expenses for the fiscal 2003 period were approximately $2,663,000
compared to $2,509,000 for the fiscal 2002 period, an increase of $154,000 or
6.1%. As a percentage of net sales, these expenses decreased to 8.5% in the
fiscal 2003 period from 8.7% in the fiscal 2002 period, primarily as a result of
the absorption of certain fixed costs over a higher sales volume. The actual
increase is principally the result of the higher sales volume.
General and administrative expenses for the fiscal 2003 period were
approximately $2,617,000 compared to $2,692,000 for the fiscal 2002 period, a
decrease of $75,000 or 2.8%. As a percentage of net sales, these expenses
decreased to 8.4% in the fiscal 2003 period from 9.3% in the fiscal 2002 period
principally due to the absorption of certain fixed costs over an increased sales
volume together with the elimination of goodwill amortization in accordance with
SFAS No. 142. The actual decline in general and administrative expenses was
principally the result of the elimination of goodwill amortization offset by
increased amortization of loan costs and expenses related to the Company's
e-commerce operations.
Selling and marketing costs for the fiscal 2003 period were approximately
$3,289,000, compared to $2,990,000 for the fiscal 2002 period, an increase of
$299,000 or 10.0%. As a percentage of net sales, these expenses increased
slightly to 10.5% in the fiscal 2003 period from 10.4% in the fiscal 2002
period. The actual increase was primarily due to increased commissions resulting
from the higher sales volume, principally to home center customers, and an
increase in marketing and product management personnel and related costs.
Other expenses for the fiscal 2003 period include a charge of $125,000
resulting from a change in the future value of the Put Warrants. For the
comparable fiscal 2002 period, there was no effect on earnings resulting from
the Put Warrants.
Interest income was insignificant for the fiscal 2003 and fiscal 2002
periods. Interest expense decreased by $184,000 to $457,000 in the fiscal 2003
period compared to $641,000 in the fiscal 2002 period primarily as a result of a
reduction in the amount of the Company's outstanding indebtedness and a decrease
in the borrowing rate applied to the Company's debt.
Provision for income taxes was approximately $543,000 in the fiscal 2003
period compared to $371,000 in the fiscal 2002 period, an increase of $172,000
or 46.4%. The estimated effective tax rate was approximately 43.2% and 38.0% for
the fiscal 2003 and fiscal 2002 periods, respectively. The estimated effective
tax rate is based upon the most recent effective tax rates available and is
higher in the fiscal 2003 period primarily as a result of the Company's European
subsidiary and the adjustment for the warrant put liability.
Net income for the fiscal 2003 period increased to $714,000 from $604,000
in the fiscal 2002 period, an increase of $110,000 or 18.2%. Net income as a
percentage of net sales increased to 2.3% in fiscal 2003 compared to 2.1% in
fiscal 2002, as a result of the reasons outlined above.
10
Liquidity and Capital Resources
Working capital as of May 31, 2002 increased to approximately $9,869,000
from approximately $9,710,000 at February 28, 2002, an increase of $159,000
primarily as a result of an increase in the Company's operations offset by
capital expenditures and the repayment of long-term debt. 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 2003 period was
$1,293,000 compared to $1,820,000 during the fiscal 2002 period. The change was
primarily due to an increase in the Company's operations, as adjusted for
non-cash charges offset by an increase in inventory and a decrease in accounts
payable for the comparable prior period. Net cash used in investing activities
was $228,000 in the fiscal 2003 period compared to $34,000 for the fiscal 2002
period. These amounts are principally attributable to technology related capital
expenditures.
Net cash used in financing activities was $301,000 during the fiscal 2003
period compared to $1,417,000 in the fiscal 2002 period. The fiscal 2003 amount
relates principally to the repayment of long term notes payable and acquisition
debt offset by an increase in short term borrowings. In addition to the regular
long-term debt and acquisition note payments, the prior year activity includes
the Company's payment of its then existing subordinated loan facility and the
entering into a new subordinated and term loan facility.
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 $20,000,000 against 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 prohibit the payment of dividends,
except with the lender's consent. As of May 31, 2002, interest was at LIBOR
(1.84% at May 31, 2002) plus 2.00%. As of May 31, 2002, the Company had
$2,813,000 available for future borrowings under the credit facility, net of
approximately $444,000 in outstanding letters of credit.
The Company's Chilean subsidiary has a revolving credit facility with a
financial institution that permits borrowings of up to $50,000 with interest at
18% per year and is secured by a standby letter of credit given by the Company.
This facility expires on August 31, 2002 and as of May 31, 2002 the Chilean
subsidiary had approximately $21,000 available for future borrowings under the
credit facility. The Company's Australian subsidiary has an overdraft facility
that allows it to borrow against a certain percentage of accounts receivable and
inventory. At May 31, 2002 the maximum permitted borrowing was approximately
$400,000 of which approximately $95,000 was available for future borrowing.
In June 2002, the Company's Australian subsidiary entered into a new
facility with a local financial institution to provide financing of up to AUD$
2,500,000 (approximately US$ 1,300,000). This facility includes a term facility
and a short-term foreign and domestic facility that will be used to provide the
capital necessary for acquisitions and general working capital purposes. The
term facility expires in June 2005 and requires quarterly payments of AUD$
25,000 (approximately US$ 13,000) and a final balloon payment.
11
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% per annum and matures on April 5, 2007. Equal quarterly payments of $562,500
are required beginning on July 1, 2005. The agreement also provides for an
additional 3% interest if the Company does not meet certain financial covenants.
In addition, 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 on and after
April 5, 2006 based on criteria set forth in the warrant agreement. In addition,
the Company may call these warrants on and after April 5, 2007 based on the same
criteria. The Company has recorded a liability for the Put Warrants based on an
independent appraisal. Any change to the fair value of the Put Warrants is being
recognized in the earnings of the Company in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The original
discount of the subordinated credit facility is being 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 of $187,500 which began on July 1, 2001
and will end on April 1, 2003. The interest rate for this loan is LIBOR (1.84%
at May 31, 2002) plus 2.75%.
In connection with certain acquisitions during fiscal years 1999 through
2000, the Company issued three notes to the respective sellers. The first 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 as of May 31, 2002, is
$300,000. The second note, in the principal amount of $825,000, is payable in
installments: $312,500 plus interest of $12,500 was paid in December, 2000,
$312,500 plus interest of $12,500 was partially paid in December, 2001 and the
balance over a ten month period beginning January, 2002; the final installment
of $200,000 plus interest of $25,000 is due in December, 2003. The amount
outstanding on this note as of May 31, 2002 is $307,500. The third 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 and the amount
outstanding as of May 31, 2002, is $1,040,000.
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 ten years at an interest rate to be set annually (6.1% as of May
31, 2002). At May 31, 2002, the outstanding balance of this loan was
approximately $567,000 and required payments are approximately $5,700 per month.
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
The Company averaged approximately $21,026,000 of variable rate debt during
the three months ended May 31, 2002. If interest rates would have increased by
10%, the effect on the Company would have been an increase to interest expense
of approximately $26,000.
On April 5, 2001, in connection with the consummation of a loan
transaction, the Company issued warrants to HillStreet Fund LP to purchase up to
325,000 shares of the Company's common stock at our exercise price of $3.63 per
share (the "Put Warrants"). The Put Warrants are exercisable until April 5, 2011
and contain put and call provisions. If the price of a Put Warrant changes by
$0.10, the effect on the Company would be an adjustment to earnings of $32,500.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no 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 28, 2002.
Item 2. Changes in Securities
On April 5, 2001, in connection with the consummation of a loan
transaction, the Company issued Put Warrants to HillStreet Fund LP to purchase
up to 325,000 shares of the Company's common stock at an exercise price of $3.63
per share. The issuance of the Put Warrants was exempt from registration under
Section 4(2) of the Securities Act of 1933, based on representations that the
Company received from the lender.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company/(1)/
3.2 By-Laws of the Company/(2)/
4.1 Specimen Common Stock Certificate/(1)/
4.1.1 Form of Warrant issued by the Company to the representative of the
underwriters of the Company's initial public offering/(1)/
/(1)/ Incorporated by reference to Exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (Reg. No. 333-07477).
/(2)/ Incorporated by reference to Exhibit of the same number filed with the
Company's Annual Report on Form 10-K filed on May 8, 1997.
----------------
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed by the Company
during its fiscal quarter ended May 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Q.E.P. CO., INC.
Dated: July 15, 2002 By: /s/ Lewis Gould
---------------------------------------
Chairman, Chief Executive Officer and
Director
(Principal Executive Officer)
Dated: July 15, 2002 By: /s/ Marc Applebaum
---------------------------------------
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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