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, 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 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 14, 2003, 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, 2002 (Unaudited) and February 28, 2002 (Audited) ................................ 3
Consolidated Statements of Income (Unaudited)
For the Nine and Three Months Ended November 30, 2002 and 2001 ............................... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended November 30, 2002 and 2001 ......................................... 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 ................................. 16
Item 4 - Controls and Procedures .................................................................... 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings .......................................................................... 17
Item 6 - Exhibits and Reports on Form 8-K ........................................................... 17
Signatures .......................................................................................... 18
Exhibits ............................................................................................ 21
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, 2002 February 28, 2002
----------------- -----------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................................... $ 801,980 $ 435,320
Accounts receivable, less allowance for doubtful accounts of $368,000 and
$422,000 at November 30, 2002 and February 28, 2002, respectively .......... 20,405,274 17,267,501
Notes receivable ............................................................... 21,845 21,845
Inventories .................................................................... 22,437,769 19,878,478
Prepaid expenses ............................................................... 1,543,270 1,798,773
Deferred income taxes .......................................................... 485,770 485,770
------------ ------------
Total current assets ......................................................... 45,695,908 39,887,687
Property and equipment, net ......................................................... 6,215,369 6,300,022
Deferred income taxes ............................................................... 867,704 1,232,031
Intangible assets, net .............................................................. 12,267,487 14,467,852
Notes receivable .................................................................... 24,169 28,586
Other assets ........................................................................ 511,391 454,341
------------ ------------
Total assets ........................................................................ $ 65,582,028 $ 62,370,519
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit ................................................................ $ 17,429,520 $ 16,763,214
Acquisition notes payable ...................................................... 632,542 767,500
Current maturities of long-term debt ........................................... 1,778,511 2,053,179
Accounts payable ............................................................... 8,341,364 8,208,136
Accrued liabilities ............................................................ 4,725,915 2,385,755
------------ ------------
Total current liabilities .................................................... 32,907,852 30,177,784
Notes payable .................................................................. 3,778,709 3,118,629
Acquisition notes payable ...................................................... 1,455,145 1,000,000
Subordinated long term debt .................................................... 4,026,044 3,944,792
Deferred income taxes .......................................................... 504,740 504,740
Warrant put liability .......................................................... 951,000 575,000
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 2,500,000 shares authorized, $1.00 par value; 336,660 shares
issued and outstanding at November 30, 2002 and February 28, 2002,
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, 2002 and February 28, 2002,
respectively ................................................................. 3,381 3,381
Additional paid-in capital ..................................................... 9,068,703 9,068,703
Retained earnings .............................................................. 14,957,252 15,842,783
Cost of stock held in treasury ................................................. (436,170) (390,642)
Accumulated other comprehensive loss ........................................... (1,971,288) (1,811,311)
------------ ------------
$ 21,958,538 $ 23,049,574
------------ ------------
Total liabilities and shareholders' equity .......................................... $ 65,582,028 $ 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 NINE MONTHS AND THREE MONTHS ENDED NOVEMBER 30, 2002 AND 2001
(UNAUDITED)
Nine Months Ended Three Months Ended
November 30, November 30,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales ......................................... $ 96,950,655 $ 82,799,415 $ 32,351,502 $ 26,645,951
Cost of goods sold ................................ 63,679,614 54,992,347 21,193,040 17,748,007
------------ ------------ ------------ ------------
Gross profit ................................. 33,271,041 27,807,068 11,158,462 8,897,944
------------ ------------ ------------ ------------
Costs and expenses
Shipping ..................................... 8,838,459 7,226,292 2,895,241 2,383,997
General and administrative ................... 8,521,044 7,608,567 2,986,722 2,490,303
Selling and marketing ........................ 10,378,003 8,884,184 3,571,482 2,905,733
Other expense (income), net .................. 304,640 (220,774) 63,081 1,101
------------ ------------ ------------ ------------
28,042,146 23,498,269 9,516,526 7,781,134
------------ ------------ ------------ ------------
Operating income .................................. 5,228,895 4,308,799 1,641,936 1,116,810
Interest income ................................... 653 9,615 26 9,192
Interest expense .................................. (1,470,142) (1,812,565) (513,643) (579,324)
------------ ------------ ------------ ------------
Income before provision for income taxes and
cumulative effect of change in accounting
principle .................................... 3,759,406 2,505,849 1,128,319 546,678
Provision for income taxes ........................ (1,585,377) (954,124) (464,363) (208,250)
------------ ------------ ------------ ------------
Net Income before cumulative effect of change in
accounting principle ......................... 2,174,029 1,551,725 663,956 338,428
Cumulative effect of change in accounting
principle .................................... (3,047,788) -- -- --
------------ ------------ ------------ ------------
Net (loss) income ................................. $ (873,759) $ 1,551,725 $ 663,956 $ 338,428
============ ============ ============ ============
Basic and diluted (loss) earnings per common share:
Income before cumulative effect of change in
accounting principle ......................... $ 0.64 $ 0.46 $ 0.20 $ 0.10
Cumulative effect of change in accounting
principle .................................... (0.89) -- -- --
------------ ------------ ------------ ------------
Net (loss) income ................................. $ (0.25) $ 0.46 $ 0.20 $ 0.10
============ ============ ============ ============
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, 2002 AND 2001
(UNAUDITED)
Nine Months Ended
November 30, 2002 November 30, 2001
----------------- -----------------
Cash flows from operating activities:
Net (loss) income ................................................................ $ (873,759) $ 1,551,725
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Cumulative effect of change in accounting principle .............................. 3,047,788 ---
Change in fair value of warrant put liability .................................... 376,000 ---
Depreciation and amortization .................................................... 1,373,661 1,541,457
Bad debt expense ................................................................. 247,248 104,000
Deferred income taxes ............................................................ 364,327 436,580
Changes in assets and liabilities, net of acquisitions
Accounts receivable ............................................................ (2,594,611) 398,841
Inventories .................................................................... (1,863,802) (247,706)
Prepaid expenses ............................................................... 264,073 221,134
Other assets ................................................................... (461,762) (80,897)
Accounts payable and accrued liabilities ....................................... 1,534,021 (1,943,950)
------------ -----------
Net cash provided by operating activities ...................................... 1,413,184 1,981,184
------------ -----------
Cash flows from investing activities
Capital expenditures ........................................................... (868,358) (285,940)
Acquisitions, net of cash acquired ............................................. (495,630) ---
------------ -----------
Net cash used in investing activities .......................................... (1,363,988) (285,940)
------------ -----------
Cash flows from financing activities:
Net borrowings under lines of credit ........................................... 666,306 1,093,889
Borrowings of long-term debt ................................................... 4,715,643 6,000,000
Repayments of long-term debt ................................................... (4,376,343) (7,704,718)
Repayments of acquisition notes payable ........................................ (475,283) (540,000)
Purchase of treasury stock ..................................................... (45,529) ---
Payments received on notes receivable .......................................... 4,417 4,418
Purchase of common stock warrants .............................................. --- (13,175)
Dividends ...................................................................... (11,770) (18,952)
------------ -----------
Net cash provided by (used in) financing activities ............................ 477,441 (1,178,538)
------------ -----------
Cumulative currency translation adjustment ............................................ (159,977) (571,656)
Net increase (decrease) in cash ....................................................... 366,660 (54,950)
Cash and cash equivalents at beginning of period ...................................... 435,320 397,817
------------ -----------
Cash and cash equivalents at end of period ............................................ $ 801,980 $ 342,867
============ ===========
Supplemental disclosure of cash flow information:
Interest paid .................................................................. $ 1,309,028 $ 1,908,140
Income taxes paid .............................................................. $ 891,621 $ 665,915
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 nine
and three months ended November 30, 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:
November 30, 2002 February 28, 2002
----------------- -----------------
Raw materials and work-in-process ............. $ 3,958,325 $ 3,837,402
Finished goods ................................ 18,479,444 16,041,076
----------- -----------
$22,437,769 $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 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, 2002 and 2001,
the weighted average number of basic shares of common stock outstanding amounted
to 3,381,190. For the nine months ended November 30, 2002 and November 30, 2001,
the weighted average number of diluted shares of common stock outstanding
amounted to 3,440,424 and 3,386,819, respectively. For the three months ended
November 30, 2002 and November 30, 2001, the weighted average number of diluted
shares of common stock outstanding amounted to 3,434,731 and 3,393,212,
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, 2002 and 2001, the Company's
comprehensive (loss) income totaled ($1,033,736) and $980,071, respectively.
Excluding the effect of the change in accounting principle, the Company's
comprehensive income for the nine months ended November 30, 2002 was $2,014,052.
For the three months ended November 30, 2002 and 2001, the Company's
comprehensive income totaled $670,824 and $16,211, respectively. The change in
accounting principle did not effect comprehensive income for the three months
ended November 30, 2002.
Note 5. Non-cash Investing and Financing Activities
In July 2002, the Company made an acquisition of an Australian
distributor. In connection with this acquisition, liabilities were assumed as
follows:
Cash paid $ 495,630
Liabilities assumed 718,222
Issuance of notes to related seller 795,470
------------
Purchase price $ 2,009,322
Fair value of assets acquired 1,596,296
------------
Excess of purchase price over fair value of assets
acquired $ 413,026
============
7
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Debt Refinancing
In November 2002 the Company entered into an amended and restated loan
agreement with its existing lender. Under the terms of the agreement the Company
obtained a $4 million dollar term loan, which was used to refinance its existing
two term loans with this lender and provide additional working capital. Under
the terms of the new loan, which will mature in 2007, the Company will pay
$400,000 per quarter during the first year of the loan and $200,000 per quarter
thereafter. The agreement, which now includes another financial institution as a
participant, also increased the Company's borrowing capacity under a revolving
loan facility to $23 million dollars under the same formula for eligible
accounts receivable and inventory that currently exists for the Company. The
term loan and the revolver each have an interest rate that ranges from Libor
plus 1.50% to Libor plus 2.25%, and are collateralized by substantially all of
the Company's assets. The agreement also prohibits the Company from incurring
certain additional indebtedness, limits certain investments, advances or loans
and restricts substantial asset sales and capital expenditures. At November 30,
2002, the rate was Libor (1.69% at November 30, 2002) plus 2.00% and the Company
had approximately $2,420,000 available for future borrowings under its facility.
Prior to this agreement the Company's revolver provided borrowings for
up to $20 million dollars. Interest on this revolver and one of its term loans
ranged from Libor plus 1.75% to Libor plus 2.5%. The Company also had a second
term note, which it obtained in April 2001 at an interest rate of Libor plus
2.75%. Both of these term notes were repaid as a result of the November 2002
refinancing.
The lending institutions have also agreed to refinance the Company's
mortgage loan in Canada and to finance the Company's expansion of this facility.
The mortgage refinancing will be for 80% of the as-built appraisal, is expected
to be approximately $1.4 million, will amortize over a 15-year period, will
mature in October 2007 and will bear an interest rate of Libor plus 2.00%.
Finally, under the terms of the agreement, the lending institutions will
also provide the Company with approximately $4.5 million in a second term
financing to refinance its existing Subordinated Debt Facility. This financing
will be available to the Company no earlier than May 2003 and is to be repaid in
monthly installments over a three year period, requires the personal guaranty of
the Company's Chairman, has an interest rate of Libor plus 3.25% and is
conditioned upon the Company meeting certain financial covenants. The Company
has not closed on either the mortgage or the second term loan.
Note 7. 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 April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". FASB No. 145 rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". This Statement also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers". This Statement amends FASB Statement
No. 13, "Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical
8
corrections, clarify meanings, or describe their applicability under changed
conditions. This Statement is effective for financial statements issued on or
after May 15, 2002. The adoption of this standard did not have an effect on the
financial statements of the Company.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. The
standard is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company anticipates that the adoption of this
standard will not have a material effect on its financial statements.
Note 8. 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 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 were not 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.
In August 2002, the Company completed the valuation of its goodwill for
impairment under the provisions of SFAS No. 142. As a result of this evaluation,
the Company determined that the goodwill associated with its Latin American and
European subsidiaries was impaired and, as a result, the Company recorded a
charge to earnings of approximately $3,048,000 effective March 1, 2002 and this
charge was recognized 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 three nor six months ended November 30,
2002. If SFAS No. 142 was in effect during the comparable three and nine months
ended November 30, 2001, the Company would not have recognized approximately
$117,000 and $353,000, respectively in goodwill amortization; therefore, net
income applicable to common shareholders would have increased to approximately
$455,000 and $1,905,000, respectively and earnings per share applicable to
common shareholders would have increased by $0.03 and $0.10, respectively.
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 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 to 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 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, the Company's belief that there will be no future adverse effect on
the fair value of the Company's assets in accordance with the provisions of SFAS
No. 142 and other risks and uncertainties described elsewhere herein.
Results of Operations
Nine months ended November 30, 2002 compared to nine months ended
November 30, 2001
Net sales for the nine months ended November 30, 2002 were approximately
$96,951,000 compared to approximately $82,799,000 for the nine months ended
November 30, 2001, an increase of $14,152,000 or 17.1%. Sales increased
primarily as a result of an increase in volume to the Company's home center
customer base resulting from new product introduction into existing stores and
an increase in the number of home center stores operated by these customers, in
addition to increased sales attributable to the acquisition of the Australian
distributor (approximating $2.6 million). Selling prices remained relatively
stable during the period.
Gross profit for the fiscal 2003 period was approximately $33,271,000
compared to $27,807,000 for the fiscal 2002 period, an increase of $5,464,000 or
19.6%. As a percentage of net sales, gross profit increased to 34.3% in the
fiscal 2003 period from 33.6% in the fiscal 2002 period. The Company has
increased its gross margin through a
10
reduction of certain raw material costs and a change, by its customers, towards
higher margin products. Additionally, the Company experienced an increase in
gross margin at the Company's European subsidiary.
Shipping expenses for the fiscal 2003 period were approximately
$8,838,000 compared to $7,226,000 for the fiscal 2002 period, an increase of
$1,612,000 or 22.3%. As a percentage of net sales, these expenses increased to
9.1% in the fiscal 2003 period from 8.7% in the fiscal 2002 period primarily as
a result of a decrease in the Company's average order size and an increase in
freight rates charged by common carriers. The actual increase is a result of the
higher sales volume to home center customers and the absorption, by the Company,
of a higher percentage of freight costs to its domestic distributor customers.
Further, the newly acquired Australian distributor accounted for approximately
$200,000 of the actual increase.
General and administrative expenses for the fiscal 2003 period were
approximately $8,521,000 compared with approximately $7,609,000 for the fiscal
2002 period, an increase of $912,000 or 12.0%. As a percentage of net sales,
these expenses decreased to 8.8% in the fiscal 2003 period from 9.2% in the
fiscal 2002 period, principally due to the absorption of certain fixed costs
over a higher sales volume and the elimination of goodwill amortization in
accordance with SFAS No. 142 amounting to approximately $353,000. The actual
increase was primarily the result of an increase in personnel resulting from the
Company's Australian acquisition and its domestic e-commerce operations.
Selling and marketing costs for the fiscal 2003 period were
approximately $10,378,000 compared to $8,884,000 for the fiscal 2002 period, an
increase of $1,494,000 or 16.8%. As a percentage of net sales, these expenses
remained flat at 10.7% in the fiscal 2003 and fiscal 2002 periods. 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 and an
increase in the Company's marketing and product management costs to facilitate
future growth. Additionally, approximately $210,000 of the increase is a result
of the newly acquired Australian distributor.
Other expenses for the nine months ended November 30, 2002 include,
among other things, a charge of $376,000 resulting from a change in the future
value of the Put Warrants. For the comparable fiscal 2002 period, there was no
effect on earnings as a result of the Put Warrants.
Interest income for the fiscal 2003 period was approximately $1,000
compared to $10,000 in the fiscal 2002 period. Interest expense for the fiscal
2003 period was approximately $1,470,000 compared to approximately $1,813,000 in
the fiscal 2002 period. Interest expense decreased primarily as a result of a
decrease in the borrowing rate applied to the Company's outstanding indebtedness
and the elimination of the interest rate swap agreements that negatively
impacted the fiscal 2002 period.
Provision for income taxes was approximately $1,585,000 in the fiscal
2003 period compared to approximately $954,000 in the fiscal 2002 period, an
increase of $631,000 or 66.1%. The effective tax rate was approximately 42.2%
for the fiscal 2003 period and 38.1% for the fiscal 2002 period. The estimated
tax rate is based upon the most recent effective tax rates available and is
higher in fiscal 2003 primarily due to the Company not recognizing an income tax
benefit for the European subsidiary's loss and the aforementioned adjustment to
the warrant put liability.
In August 2002, the Company completed the valuation of its goodwill in
accordance with the provisions of SFAS No. 142. The result of this valuation was
an impairment loss to goodwill at the Company's European and Latin American
subsidiaries. This impairment loss, amounting to approximately $3,048,000, was
recorded as a cumulative effect of a change in accounting principle and was
effected as of March 1, 2002.
As a result of the above, net income, exclusive of the cumulative effect
of a change in accounting principle, for the fiscal 2003 period increased to
$2,174,000 from $1,552,000 in the fiscal 2002 period, an increase of $622,000 or
40.1% and net income as a percentage of net sales increased to 2.2% in the
fiscal 2003 period compared to 1.9% in the fiscal 2002 period. Inclusive of the
approximate $3,048,000 change in accounting principle, the Company's net loss
for the fiscal 2003 period was approximately $874,000.
11
Three months ended November 30, 2002 compared to three months ended
November 30, 2001.
Net sales for the three months ended November 30, 2002 were
approximately $32,352,000 compared to approximately $26,646,000 for the three
months ended November 30, 2001, an increase of $5,706,000 or 21.4%. The increase
is primarily the result of an increase in sales to the Company's home center
customer base resulting from new store openings and new product introduction
into existing stores. Also, the newly acquired Australian distributor accounted
for approximately $1.3 million of the increase in net sales. Selling prices
remained relatively stable during the period.
Gross profit for the fiscal 2003 quarter was approximately $11,158,000
compared to approximately $8,898,000 in the fiscal 2002 quarter, an increase of
$2,260,000 or 25.4%. As a percentage of net sales, gross profit increased from
33.4% in the fiscal 2002 quarter to 34.5% in the fiscal 2003 quarter, primarily
due to a reduction in certain raw material costs and a change in the Company's
domestic product mix towards higher margin products and an increase in margin at
the Company's European subsidiary.
Shipping expenses for the fiscal 2003 quarter were approximately
$2,895,000 compared to approximately $2,384,000 for the fiscal 2002 quarter, an
increase of $511,000 or 21.4%. As a percentage of net sales, these expenses
remained flat at 8.9% in the fiscal 2003 and 2002 periods. The actual increase
was the result of the higher sales volume and approximately $121,000 from the
newly acquired Australian distributor.
General and administrative expenses for the fiscal 2003 quarter were
approximately $2,987,000 compared to approximately $2,490,000 for the fiscal
2002 quarter, an increase of $497,000 or 20.0%. As a percentage of net sales,
general and administrative expenses decreased to 9.2% in the fiscal 2003 quarter
from 9.3% in the fiscal 2002 quarter, primarily as a result of fixed costs being
spread over an increased sales volume. The actual increase is primarily the
result of an increase in costs at the Company's foreign subsidiaries, an
increase in personnel costs and e-commerce costs at the Company's domestic
operations and approximately $100,000 from the Australian distributor recently
acquired by the Company offset by the elimination of goodwill amortization in
accordance with SFAS No. 142 in the approximate amount of $117,000.
Selling and marketing costs for the fiscal 2003 quarter were
approximately $3,571,000 compared to approximately $2,906,000 for the fiscal
2002 quarter, an increase of $665,000 or 22.9%. As a percentage of net sales,
these expenses increased to 11.0% in the fiscal 2003 quarter from 10.9% in the
fiscal 2002 quarter, reflecting higher commissions paid to the Company's sales
force. The actual increase is primarily the result of an increase in commissions
and marketing allowances paid as a result of the increase in sales volume to the
Company's home center customer base and an approximate $110,000 increase
attributable to the newly acquired Australian distributor.
Other expenses for the fiscal 2003 period include, among other things, a
charge of $120,000 resulting from the 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 for the fiscal 2003 quarter was insignificant compared
to $9,000 for the fiscal 2002 quarter. Interest expense for the fiscal 2003
quarter was approximately $514,000 compared to approximately $579,000 in the
fiscal 2002 quarter. Interest expense decreased as a result of a reduction in
the amount of the Company's outstanding long-term indebtedness and a reduction
in the borrowing rate applied to that indebtedness. Further, the prior period
was negatively impacted by the interest rate swap agreements in existence in the
prior year.
Provision for income taxes was approximately $464,000 in the fiscal 2003
period compared to $208,000 in the fiscal 2002 quarter, an increase of
approximately $256,000 or 123.1%. The effective tax rate was approximately 41.1%
for the fiscal 2003 quarter and 38.0% for the 2002 quarter. The estimated tax
rate is based upon the most recent tax rates available and is higher in fiscal
2003 primarily due to the Company not recognizing an income tax benefit for the
European subsidiary's loss and the aforementioned adjustment to the warrant put
liability.
12
As a result of the above, net income for the fiscal 2003 quarter was
approximately $664,000 compared to approximately $338,000 for the fiscal 2002
quarter, an increase of $326,000 or 96.4%. As a percentage of net sales, the net
income was 2.1% in the fiscal 2003 quarter compared to a net income of 1.3% in
the fiscal 2002 quarter.
Liquidity and Capital Resources
Working capital as of November 30, 2002 increased from approximately
$9,710,000 at February 28, 2002 to $12,788,000, an increase of $3,078,000,
primarily as a result of an increase in the Company's income from operations,
the refinancing of the Company's debt in November 2002 as further described
herein and an approximate increase of $1,177,000 resulting from the acquisition
of the Australian distributor. 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 approximately $1,413,000 compared to approximately $1,981,000 for the
comparable fiscal 2002 period. The decrease is primarily due to an increase in
the Company's income from operations, as adjusted for non-cash charges, and an
increase in accounts receivable and inventory offset by an increase in accounts
payable. Net cash used in investing activities was approximately $1,364,000
compared to approximately $286,000 for the comparable fiscal 2002 period. The
change is primarily due to an increase in capital expenditures of approximately
$580,000 and approximately $500,000 of cash used to purchase the Australian
distributor.
For the fiscal 2003 period, cash provided by financing activities was
approximately $477,000 compared to cash used in financing activities of
approximately $1,179,000 for the comparable fiscal 2002 period. Cash provided by
financing activities for the current year was primarily the result of an
increase in long term debt and the Company's line of credit facility offset by
payments of long term debt. Cash used in financing activities for the prior year
was principally 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
In November 2002 the Company entered into an amended and restated loan
agreement with its existing lender. Under the terms of the agreement the Company
obtained a $4 million dollar term loan, which was used to refinance its existing
two term loans with this lender and provide additional working capital. Under
the terms of the new loan, which will mature in 2007, the Company will pay
$400,000 per quarter during the first year of the loan and $200,000 per quarter
thereafter. The agreement, which now includes another financial institution as a
participant, also increased the Company's borrowing capacity under a revolving
loan facility to $23 million dollars under the same formula for eligible
accounts receivable and inventory that currently exists for the Company. The
term loan and the revolver have an interest rate that ranges from Libor plus
1.50% to Libor plus 2.25%, and are collateralized by substantially all of the
Company's assets. The agreement also prohibits the Company from incurring
certain additional indebtedness, limits certain investments, advances or loans
and restricts substantial asset sales and capital expenditures. At November 30,
2002, the rate was Libor (1.69% at November 30, 2002) plus 2.00% and the Company
had approximately $2,420,000 available for future borrowings under its facility.
Prior to this agreement the Company's revolver provided borrowings for
up to $20 million dollars. Interest on this revolver and one of its term loans
ranged from Libor plus 1.75% to Libor plus 2.5%. The Company also had a second
term note, which it obtained in April 2001 at an interest rate of Libor plus
2.75%. Both of these term notes were repaid as a result of the November 2002
refinancing.
The lending institutions have also agreed to refinance the Company's
mortgage loan in Canada and to finance the Company's expansion of this facility.
The mortgage refinancing will be for 80% of the as-built appraisal, is expected
to be approximately $1.4 million, will amortize over a 15-year period, will
mature in October 2007 and will bear an interest rate of Libor plus 2.00%.
13
Finally, under the terms of the agreement, the lending institutions will
also provide the Company approximately $4.5 million in a second term financing
to refinance its existing Subordinated Debt Facility. This financing will be
available to the Company no earlier than May 2003 and is to be repaid in monthly
installments over a three year period, requires the personal guaranty of the
Company's Chairman, has an interest rate of Libor plus 3.25% and is conditioned
upon the Company meeting certain financial covenants. The Company has not closed
on either the mortgage or the second term loan.
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 May 31, 2003 and, at November 30, 2002, the
Chilean subsidiary had the full amount of the facility available for future
borrowings.
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, 2002 the maximum permitted borrowing was approximately $363,000
and was fully utilized.
In connection with an acquisition in July 2002, the Company's Australian
subsidiary entered into a new term loan facility with an Australian financial
institution to provide financing of up to AUD$ 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. Further, in July 2002 approximately AUD
$1,298,000 (approximately US $715,000) of this facility was used to provide
financing for the acquisition of an Australian distributor and, in addition, the
Company issued a note to the related seller in the approximate amount of AUD
$1,445,000 (approximately US $795,500). This note requires monthly payments in
the amount of approximately $14,700 through December 2006 with interest at 6.5%.
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.
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 was originally payable in equal
installments over a three year period with interest at the Company's prevailing
borrowing rate. In October 2002, the Company paid $50,000 and amended the
agreement to provide for payments of $125,000 each on October 10, 2003 and 2004.
Interest on the extended payments is payable quarterly at 7%. The amount
outstanding on this note as of November 30, 2002 was $250,000. 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 was paid 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 November 30, 2002 was $200,000. 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
November 30, 2002 was $880,000.
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
14
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 November 30, 2002). At November 30, 2002, the outstanding
balance of this loan was approximately $522,000 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 may be required to raise additional
capital through loans or the issuance of debt securities that would require the
consent of the Company's current lender, or the issuance of equity securities.
To the extent the Company raises additional capital by issuing equity securities
or obtaining borrowings convertible into equity, ownership dilution to existing
stockholders will result, and future investors may be granted rights superior to
those of existing stockholders. Moreover, additional capital may be unavailable
to the Company on acceptable terms or may not be available at all.
15
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company averaged approximately $21,400,000 and $21,300,000 of
variable rate debt during the nine and three months ended November 30, 2002,
respectively. If interest rates would have increased by 10%, the effect on the
Company would have been an increase to interest expense of approximately $54,000
and $27,000, respectively.
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 an 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. The put price of the Put Warrants is
variable based upon the Company's value at the time the put rights are
exercised, and a change in the put price of $0.10 would result in an adjustment
to earnings of $32,500.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon the evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective in timely alerting them to material information
relating to the Company and its consolidated subsidiaries required to be
included in the Company's periodic filings. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect those controls subsequent to the date of the evaluation.
16
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 22, 2002.
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)/
10.1 Employment Agreement dated May 1, 2002 by and between Lewis Gould and the Company.
10.2 Second Amended and Restated Loan Agreement dated November 14, 2002, by and among the
Company, its subsidiaries, Fleet Capital Corporation, HSBC Bank USA and Fleet Capital
Corporation, as Agent.
10.3 Form of Term Note, Domestic Advances Note, Foreign Advances Note and B.V. Note executed
in connection with Second Amended and Restated Loan Agreement dated November 14, 2002.
99.1 Certification by Lewis Gould, Chief Executive Officer and Chairman of the Board of
Directors, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification by Marc P. Applebaum, Senior Vice President and Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
/(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 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, 2002.
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: January 14, 2003 By: /s/ Lewis Gould
------------------------------
Lewis Gould, Chairman, Chief
Executive Officer and Director
(Principal Executive Officer)
Dated: January 14, 2003 By: /s/ Marc P. Applebaum
------------------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
CERTIFICATIONS
I, Lewis Gould, Chairman of the Board of Directors and Chief Executive Officer
of Q.E.P. Co., Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Q.E.P. Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
DATE: January 14, 2003
/s/ Lewis Gould
--------------------------------------------
Chairman, Chief Executive Officer
and Director
19
I, Marc P. Applebaum, Senior Vice President and Chief Financial Officer of
Q.E.P. Co., Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Q.E.P. Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
DATE: January 14, 2003
/s/ Marc P. Applebaum
-----------------------------------------------------
Senior Vice President and Chief Financial Officer
20
Exhibit Index
Exhibit
Number Description
------- -----------
10.1 Employment Agreement dated May 1, 2002 by and between Lewis Gould
and the Company.
10.2 Second Amended and Restated Loan Agreement dated November 14, 2002,
by and among the Company, its subsidiaries, Fleet Capital
Corporation, HSBC Bank USA and Fleet Capital Corporation, as agent.
10.3 Form of Term Note, Domestic Advances Note, Foreign Advances Note and
B.V. Note executed in connection with Second Amended and Restated
Loan Agreement dated November 14, 2002.
99.1 Certification by Lewis Gould, Chief Executive Officer and Chairman
of the Board of Directors, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Marc Applebaum, Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.