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, 2000
Commission file number: 0-21161
Q.E.P. CO., INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2983807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1081 Holland Drive
Boca Raton, Florida 33487
(Address of principal executive offices)
(Zip code)
(561) 994-5550
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of January 15, 2001: 3,351,777 shares of common stock, par value
$.001 per share.
Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
November 30, 2000 (Unaudited) and February 29, 2000 *.......................................... 3
Consolidated Statements of Income (Unaudited)
For the Nine and Three Months Ended November 30, 2000 and 1999................................. 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended November 30, 2000 and 1999........................................... 5
Notes to Consolidated Financial Statements................................................................. 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............. 9
Item 3 - Qualitative and Quantitative Disclosures about Market Risk........................................ 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................................................. 16
Item 6 - Exhibits and Reports on Form 8-K.................................................................. 16
Signatures................................................................................................. 17
* The February 29, 2000 balance sheet was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States.
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, 2000 February 29, 2000*
----------------- ------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 1,216,772 $ 829,063
Accounts receivable, less allowance for doubtful accounts of $582,000
and $741,000 at November 30, 2000 and February 29, 2000, respectively ... 15,232,809 16,176,540
Notes receivable .......................................................... 1,342,264 1,681,210
Inventories ............................................................... 20,454,046 17,588,885
Prepaid expenses .......................................................... 601,047 972,992
Deferred income taxes ..................................................... 752,630 752,630
------------ ------------
Total current assets .................................................... 39,599,568 38,001,320
Property and equipment, net .................................................... 7,051,982 4,329,695
Deferred income taxes .......................................................... 706,972 1,271,445
Intangible assets, net ......................................................... 15,223,122 13,251,699
Notes receivable ............................................................... 34,770 42,339
Other assets ................................................................... 734,876 818,215
------------ ------------
Total assets ................................................................... $ 63,351,290 $ 57,714,713
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit ........................................................... $ 14,930,921 $ 10,414,746
Acquisition notes payable ................................................. 932,500 1,872,500
Current maturities of long-term debt ...................................... 1,433,861 1,470,092
Subordinated debt ......................................................... 6,050,944 --
Accounts payable .......................................................... 9,043,925 6,452,570
Accrued liabilities ....................................................... 2,247,610 4,280,901
------------ ------------
Total current liabilities ............................................... 34,639,761 24,490,809
Notes payable ............................................................. 4,438,627 4,584,076
Acquisition notes payable ................................................. 2,012,500 1,112,500
Subordinated debt ......................................................... -- 5,891,126
Deferred income taxes ..................................................... 453,286 453,286
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 2,500,000 shares authorized, $1.00 par value; 336,660
shares issued and outstanding at November 30, 2000 and February 29, 2000,
respectively ............................................................ 336,660 336,660
Common stock, 20,000,000 shares authorized, $.001 par value; 3,383,750
and 3,356,175 shares issued and outstanding at November 30, 2000 and
February 29, 2000, respectively ......................................... 3,384 3,356
Additional paid-in capital ................................................ 9,081,879 8,946,061
Retained earnings ......................................................... 13,327,096 12,337,614
Cost of stock held in treasury ............................................ (299,265) (57,900)
Accumulated other comprehensive income .................................... (642,638) (382,875)
------------ ------------
$ 21,807,116 $ 21,182,916
------------ ------------
Total liabilities and shareholders' equity ..................................... $ 63,351,290 $ 57,714,713
============ ============
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, 2000 AND 1999
(UNAUDITED)
Nine Months Ended Three Months Ended
November 30 November 30,
----------- ------------
2000 1999 2000 1999
---- ---- ---- ----
Net Sales .................................................... 86,047,494 84,489,837 26,306,248 28,230,599
Cost of goods sold ........................................... 59,263,810 58,945,812 18,700,293 19,562,607
------------ ------------ ------------ ------------
Gross profit ............................................ 26,783,684 25,544,025 7,605,955 8,667,992
------------ ------------ ------------ ------------
Costs and expenses
Shipping ................................................ 7,206,504 6,491,448 2,489,134 2,184,524
General and administrative .............................. 7,562,038 7,054,323 2,517,373 2,342,910
Selling and marketing ................................... 8,456,013 7,085,065 2,827,165 2,455,210
Restructuring charge .................................... 637,462 -- 637,462 --
Other (income) expense, net ............................. (87,532) 5,798 (41,435) (4,128)
------------ ------------ ------------ ------------
23,774,485 20,636,634 8,429,699 6,978,516
------------ ------------ ------------ ------------
Operating income (loss) ...................................... 3,009,199 4,907,391 (823,744) 1,689,476
Interest income .............................................. 60,989 77,878 17,576 21,734
Interest expense ............................................. (1,453,035) (1,348,460) (481,044) (431,994)
------------ ------------ ------------ ------------
Income (loss) before provision for (benefit from) income taxes
and extraordinary item .................................. 1,617,153 3,636,809 (1,287,212) 1,279,216
Provision for (benefit from) income taxes .................... 616,064 1,387,532 (490,427) 504,369
------------ ------------ ------------ ------------
1,001,089 2,249,277 (796,685) 774,847
Extraordinary item, gain on early extinguishment of debt ..... -- 181,559 -- 181,559
------------ ------------ ------------ ------------
Net Income(loss) ............................................. $ 1,001,089 $ 2,430,836 $ (796,785) $ 956,406
============ ============ ============ ============
Basic and diluted net income (loss) per common share:
Income (loss) before extraordinary item ................. $ 0.29 $ 0.67 $ (0.24) $ 0.23
Extraordinary item ...................................... $ -- $ 0.06 $ -- $ 0.06
------------ ------------ ------------ ------------
Net income (loss) per share ............................. $ 0.29 $ 0.73 $ (0.24) $ 0.29
============ ============ ============ ============
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, 2000 AND 1999
(UNAUDITED)
Nine Months Ended
November 30, 2000 November 30,1999
----------------- ----------------
Cash flows from operating activities:
Net income .......................................................... $ 1,001,089 $ 2,430,836
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of equipment ........................................... (80,530) --
Depreciation and amortization ....................................... 1,532,277 1,120.674
Provision for doubtful accounts ..................................... 76,881 373,641
Gain on early extinguishment of debt ................................ -- (181,559)
Deferred income taxes ............................................... 564,473 513,293
Changes in assets and liabilities, net of acquisitions
Accounts receivable ............................................... 946,731 (104,399)
Inventories ....................................................... (2,551,738) (7,488)
Prepaid expenses .................................................. 371,945 (51,501)
Other assets ...................................................... (617,194) (144,794)
Accounts payable and accrued liabilities .......................... 482,355 (706,789)
----------- -----------
Net cash provided by operating activities ......................... 1,726,289 3,241,914
----------- -----------
Cash flows from investing activities
Capital expenditures .............................................. (1,564,285) (491,928)
Purchase of license agreement ..................................... (200,000) (833,050)
Proceeds from sale of fixed assets ................................ 150,000 --
Acquisitions, net of cash acquired ................................ (1,116,517) (1,605,365)
----------- -----------
Net cash used in investing activities ............................. (2,730,802) (2,930,343)
----------- -----------
Cash flows from financing activities:
Net borrowings under lines of credit .............................. 4,516,175 1,790,291
Repayments of long-term debt ...................................... (1,023,235) (926,172)
Repayments of acquisition notes payable ........................... (2,070,343) (263,460)
Purchase of subordinated debentures ............................... -- (1,093,817)
Proceeds from exercise of stock options ........................... 136,008 199,008
Purchase of treasury stock ........................................ (241,365) --
Payments on notes receivable ...................................... 346,515 581,893
Dividends ......................................................... (11,770) (11,771)
----------- -----------
Net cash provided by financing activities ......................... 1,651,985 275,972
----------- -----------
Cumulative currency translation adjustment ............................... (259,763) (156,301)
Net increase in cash ..................................................... 387,709 431,242
Cash and cash equivalents at beginning of period ......................... 829,063 290,066
----------- -----------
Cash and cash equivalents at end of period ............................... $ 1,216,772 $ 721,308
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ..................................................... $ 1,613,796 $ 1,281,000
Income taxes paid ................................................. $ 1,708,797 $ 1,357,000
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 29, 2000, of Q.E.P. Co.,
Inc. (the "Company") as filed with the Securities and Exchange Commission. The
February 29, 2000 balance sheet was derived from audited financial statements
but does not include all disclosures required by accounting principles generally
accepted in the United States. The results of operations for the nine and three
months ended November 30, 2000 are not necessarily indicative of the results for
the full fiscal year ending February 28, 2001.
Note 2. Inventories
The major classes of inventories are as follows:
November 30, 2000 February 29, 2000
----------------- -----------------
Raw materials and work-in-process....... $ 6,825,298 $ 4,576,530
Finished goods.......................... 13,628,748 13,012,355
-------------- --------------
$ 20,454,046 $ 17,588,885
============== ==============
Note 3. Earnings per Share
Basic earnings per share is computed by dividing net income, after
deducting preferred stock dividends accumulated during the period, by the
weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share is computed by dividing net income, after
deducting preferred stock dividends 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, 1999, the
weighted average number of basic shares of common stock outstanding amounted to
3,342,229 and 3,356,118, respectively. For the nine months and the three months
ended November 30, 2000, the weighted average number of basic shares of common
stock outstanding amounted to 3,367,458 and 3,373,092, respectively. For the
nine months ended November 30, 2000 and November 30, 1999, the weighted average
number of diluted shares of common stock outstanding amounted to 3,395,885 and
3,362,028, respectively. For the three months ended November 30, 2000 and
November 30, 1999, the weighted average number of diluted shares of common stock
outstanding amounted to 3,393,021 and 3,369,330, respectively.
6
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Equity
On June 6, 2000, the Board of Directors declared a five for four stock
split of the Company's common stock, effected in the form of a stock dividend
which was paid on August 1, 2000. As a result of this action, approximately
673,000 shares were issued to shareholders of record on July 17, 2000. Par value
of the common stock remains at $0.001 per share and, accordingly, $673 was
transferred from retained earnings to common stock.
The effect on earnings per share was a reduction of $0.08 and $0.17 per
share for the nine months ended November 30, 2000 and 1999, respectively, and a
reduction of $0.05 and $0.06 per share for the three months ended November 30,
2000 and 1999, respectively. All references to the number of common shares and
per common share amounts have been restated to give retroactive effect to the
stock split for all periods presented.
Note 5. Comprehensive Income
The Company records comprehensive income in accordance with Financial
Accounting Standards (SFAS) No. 130, "Reporting comprehensive Income." SFAS 130
requires foreign currency translation adjustments to be included in other
comprehensive income.
For the nine months ended November 30, 2000 and 1999, the Company's
comprehensive income totaled $741,326 and $2,274,535, respectively. For the
three months ended November 30, 2000 and 1999, the Company's comprehensive
(loss) income totaled ($1,020,392) and $890,334, respectively.
Note 6. License Agreement
Effective May 15, 2000, the Company entered into an agreement to
license the distribution rights of its tackless carpet strip product to U.S.
flooring products distributors. Under the terms of the agreement, the Company
will receive $2,750,000 at a predetermined rate based on cartons of tack strip
sold by the licensee. The company is guaranteed to receive a minimum of $400,000
per year. In addition, the Company will retain the right and will continue to
sell tackless carpet strip to the Home Center and International markets. For the
nine months ended November 30, 2000 and 1999, the Company sold approximately
$2,924,000, and $10,566,000, respectively and for the three months ended
November 30, 1999, the Company sold approximately $3,273,000, of tackless carpet
strip to U.S. flooring products distributors.
Note 7. Non-cash Investing and Financing Activities
During the nine months ended November 30, 2000, the Company made
several strategic acquisitions. In connection with the acquisitions, liabilities
were assumed as follows:
Fair value of assets acquired $ 1,630,941
Cash paid 1,116,517
-----------
Liabilities assumed $ 514,424
===========
Issuance of notes to related sellers $ 1,965,700
===========
7
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 8. Future Effects of Recently Issued Accounting Pronouncements
In June 1998, SFAS No. 133 "Accounting of Derivative Instruments and
Hedging Activities" was issued. This standard establishes new accounting and
reporting standards requiring that every derivative financial instrument be
recorded in the balance sheet as either assets or liabilities and measured at
fair value. SFAS 133 requires that changes in the derivative's fair value should
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allow a derivative's gains and
losses to offset related results on the hedge item in the income statement and
requires that a company must formally and accurately document, designate and
assess the effectiveness of transactions that receive hedge.
SFAS 133 is effective for fiscal years beginning after June 15, 2000.
The effect of adopting the Standard is currently being evaluated but is
not expected to have a material effect on the Company's financial position or
results of operations.
Note 9. Reclassifications
Certain amounts in the fiscal year 2000 presentation have been
reclassified to conform to the fiscal year 2001 presentation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Q.E.P. Co., Inc. (the "Company") manufactures, markets and distributes
a broad line of specialty tools and flooring related products for the home
improvement market. The Company markets over 4,000 specialty tools and flooring
related products used primarily for surface preparation and installation of
ceramic tile, carpet and marble. The Company's products are sold to home
improvement retailers, specialty distributors, original equipment manufacturers
and chain or independent hardware, tile and carpet retailers for use by the
do-it-yourself consumer as well as the construction or remodeling professional.
Dollar figures set forth below are rounded to the nearest thousand.
From June 1999 through November 2000, the Company made several
acquisitions as part of its strategic plan to enhance its leadership in the
worldwide flooring market. These acquired entities are referred to as the "newly
acquired entities" elsewhere herein.
This report contains forward-looking statements which are made pursuant
to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
Statements as to what the Company "believes," "intends," "expects" or
"anticipates" and other similarly anticipatory expressions are generally
forward-looking and are made only as of the date of this report. Additionally,
the Company is subject to risks and uncertainties which could cause actual
results to differ materially from those discussed in the forward-looking
statements and from historical results of operations. Among the risks and
uncertainties which could cause such a difference are the assumptions upon which
the Company bases its assessment of its future working capital and capital
expenditure requirements and those relating to the Company's ability to satisfy
its working capital needs and to finance its anticipated capital expenditures,
which could prove to be different than expected, the Company's dependence upon a
limited number of customers for a substantial portion of its sales, the
Company's reliance upon suppliers and sales agents for the purchase of finished
products which are then resold by it, the level of demand for the Company's
products among existing and potential new customers, the Company's ability to
successfully manage and integrate the business and operations of the newly
acquired entities, the Company's dependence upon certain key personnel and its
ability to successfully integrate new management personnel into the Company, the
Company's ability to accurately predict the number and type of employees
required to conduct its European operations and the compensation required to be
paid to such personnel, delays that may be encountered in the completion of
improvements being made to the Henderson, Nevada facility prior to the Company's
occupation, delays or difficulties in obtaining any required occupational or
similar permits required prior to occupation of the premises, and any increase
in the level of current taxes or the imposition of additional taxes in
connection with the Henderson, Nevada facility, its ability to manage its
growth, the risk of economic and market factors affecting the Company or its
customers and other risks and uncertainties described elsewhere herein.
Results of Operations
Nine months ended November 30, 2000 compared to nine months ended
November 30, 1999
Net sales for the nine months ended November 30, 2000 (the "fiscal 2001
period") were approximately $86,047,000 compared to approximately $84,490,000
for the nine months ended November 30, 1999 (the "fiscal 2000 period"), an
increase of $1,557,000 or 1.8%. Net sales for the fiscal 2001 period were
negatively impacted by (i) the Company's decision to license the right to
distribute its tackless carpet strip product to U.S. flooring distributors,
thereby exiting that segment of the tackless carpet strip business, and (ii)
additional incentives provided by the Company to one of its major customers,
collectively aggregating approximately $11,626,000. These negative impacts were
offset by a general increase in volume especially to home center retailers
resulting principally from new store openings and new product introduction to
existing stores. During the period, selling prices remained relatively stable.
Additionally, the newly acquired entities accounted for approximately $5,449,000
of increased sales volume.
Gross profit for the fiscal 2001 period was approximately $26,784,000
compared to $25,544,000 for the fiscal 2000 period, an increase of $1,240,000 or
4.9%. As a percentage of net sales, gross profit increased to 31.1% in the
9
fiscal 2001 period from 30.2% in the fiscal 2000 period. This increase was
primarily the result of a change in the Company's domestic product mix towards
higher margin products and the discontinuance of the sale to domestic
distributors of the low margin tack strip product. These increases were
partially offset by the aforementioned additional customer incentives.
Shipping expenses for the fiscal 2001 period were approximately
$7,207,000 compared to $6,491,000 for the fiscal 2000 period, an increase of
$716,000 or 11.0%. As a percentage of net sales, these expenses increased to
8.4% in the fiscal 2001 period from 7.7% in the fiscal 2000 period, primarily as
a result of an increase in freight rates charged by common carriers and certain
fixed costs being absorbed by a smaller sales volume after the licensing of the
domestic distributor tack strip business. The actual increase is a result of the
higher overall sales volume and freight cost incentives given to distributor
customers resulting from the licensing of the tack strip business. Additionally,
the newly acquired entities accounted for approximately $321,000 of the actual
increase.
General and administrative expenses for the fiscal 2001 period were
approximately $7,562,000 compared with approximately $7,054,000 for the fiscal
2000 period, an increase of $508,000 or 7.2%. As a percentage of net sales,
these expenses increased to 8.8% in the fiscal 2001 period from 8.3% in the
fiscal 2000 period principally as a result of the newly acquired entities whose
costs as a percentage of sales are greater than the Company's domestic
divisions. The actual increase was the result of approximately $771,000 being
attributable to the newly acquired entities offset by a reduction of expenses at
the Company's existing divisions.
Selling and marketing costs for the fiscal 2001 period were
approximately $8,456,000 compared to $7,085,000 for the fiscal 2000 period, an
increase of $1,371,000 or 19.4%. As a percentage of net sales, these expenses
increased to 9.8% in the fiscal 2001 period from 8.4% in the fiscal 2000 period,
principally as a result of the reduced volume after the licensing of the
domestic distributor tack strip business and an increase in commission rates
paid to the Company's sales force. The actual increase is the result of an
increase in commissions and marketing allowances paid resulting from the
increase in sales to home center customers and approximately $552,000 being
attributable to the newly acquired entities.
During the third quarter of fiscal 2001, the Company finalized its plan
to close its California manufacturing facility and relocate to Nevada where it
is anticipated that the Company will realize certain manufacturing efficiencies,
reduced costs of operations and tax savings. Additionally, the Company initiated
a downsizing of its Holland subsidiary to maintain profitability. In connection
with these decisions, the Company recorded a restructuring charge of
approximately $637,000 in the fiscal 2001 period.
Interest income for the fiscal 2001 period was approximately $61,000
compared to $78,000 in the fiscal 2000 period. Interest expense for the fiscal
2001 period was approximately $1,453,000 compared to approximately $1,348,000 in
the fiscal 2000 period. Interest expense increased primarily as a result of an
increase in short-term borrowings to fund the inventory and accounts receivable
increase caused by the higher sales volume and an increase in debt to fund the
acquisition of certain newly acquired entities. This was partially offset by
repayments of long-term debt.
During the third quarter of the fiscal 2000 period, the Company
repurchased approximately $1,229,000 of its 8% Subordinated Debentures issued in
1997 to mature in April 2001. The transaction resulted in an extraordinary gain
from the early extinguishment of debt approximating $182,000.
Provision for income taxes was approximately $616,000 in the fiscal
2001 period compared to approximately $1,388,000 in the fiscal 2000 period, a
decrease of $772,000 or 55.6%. The effective tax rate was approximately 38.2%
for the fiscal 2001 and fiscal 2000 periods. The estimated tax rate is based
upon the most recent effective tax rates available.
As a result of the above, net income for the fiscal 2001 period
decreased to $1,001,000 from $2,431,000 in the fiscal 2000 period, a decrease of
$1,430,000 or 58.8%. Further, net income as a percentage of net sales decreased
to 1.2% in fiscal 2001 compared to 2.9% in fiscal 2000. If the additional
incentive provided to one of the Company's major
10
customers, the restructuring charge and certain other expenses relating to the
relocation of the Company's California facility to Nevada in the fiscal 2001
period and the extraordinary income item in the fiscal 2000 period are excluded,
net income would have remained flat at approximately $2,240,000 and net income
as a percentage of sales would have been 2.6%.
Three months ended November 30, 2000 compared to three months
ended November 30, 1999.
Net sales for the three months ended November 30, 2000 ("fiscal 2001
quarter") were approximately $26,306,000 compared to approximately $28,231,000
for the three months ended November 30, 2000 ("fiscal 2000 quarter"), a decrease
of $1,925,000 or 6.8%. Net sales for the fiscal 2001 quarter were negatively
impacted by (i) the Company's decision to license the right to distribute its
tackless carpet strip product to U.S. flooring distributors, thereby exiting
that segment of the tackless carpet strip business, and (ii) additional
incentives provided by the Company to one of its major customers, collectively
aggregating approximately $4,333,000. Offsetting these decreases was an increase
in sales volume attributable to (i) Home Center customers as a result of new
store openings and the expansion of certain product lines offered by the
Company, and (ii) an increase in sales volume of approximately $1,586,000
attributable to the newly acquired entities. Selling prices remained relatively
stable during the period.
Gross profit for the fiscal 2001 quarter was approximately $7,606,000
compared to approximately $8,668,000 in the fiscal 2000 quarter, a decrease of
$1,062,000 or 12.2%. As a percentage of net sales, gross profit decreased from
30.7% in the fiscal 2000 quarter to 28.9% in the fiscal 2001, primarily due to
the aforementioned additional sales incentive. Exclusive of this charge, gross
profit as a percentage of sales would have increased by approximately 0.8% in
the fiscal 2001 quarter compared to the fiscal 2000 quarter which is reflective
of the licensing of the low margin tack strip business and a change in domestic
product mix towards higher margin products.
Shipping expenses for the fiscal 2001 quarter were approximately
$2,489,000 compared to approximately $2,185,000 for the fiscal 2000 quarter, an
increase of $304,000 or 13.9%. As a percentage of net sales, these expenses
increased to 9.5% in the fiscal 2001 quarter from 7.7% in the fiscal 2000
quarter primarily due to a change in the Company's freight policy for certain
domestic distributor customers and certain fixed costs being spread over lower
sales. The actual increase was the result of increased sales volume and freight
costs including fuel surcharges. Additionally, the newly acquired entities
accounted for approximately $126,000 of the increase.
General and administrative expenses for the fiscal 2001 quarter were
approximately $2,517,000 compared to approximately $2,343,000 for the fiscal
2000 quarter, an increase of $174,000 or 7.4%. As a percentage of net sales,
general and administrative expenses increased to 9.6% in the fiscal 2001 quarter
from 8.3% in the fiscal 2000 quarter, primarily as a result of the newly
acquired entities whose costs as a percentage of sales are higher than the
Company's domestic divisions. The actual increase was primarily the result of
(i) approximately $182,000 of duplicate expenses incurred due to the relocation
of the California manufacturing facility and (ii) approximately $224,000 being
attributable to the newly acquired entities. These increases were offset by a
reduction in costs at the Company's domestic divisions.
Selling and marketing costs for the fiscal 2001 quarter were
approximately $2,827,000 compared to approximately $2,455,000 for the fiscal
2000 quarter, an increase of $372,000 or 15.1%. As a percentage of net sales,
these expenses increased to 10.7% in the fiscal 2001 quarter from 8.7% in the
fiscal 2000 quarter. The percentage increase is primarily a result of an
increase in certain royalty agreements, a change in the domestic distributor
commission structure and the result of increased costs being spread over a
reduced sales volume. The actual increase is the result of the higher sales
volume at home center customers and approximately $150,000 attributable to the
newly acquired entities.
During the third quarter of fiscal 2001, the Company finalized its plan
to close its California manufacturing facility and relocate to Nevada where it
is anticipated that the Company will realize certain manufacturing efficiencies,
reduced costs of operations and tax savings. Additionally, the Company initiated
a downsizing of its Holland subsidiary
11
to maintain profitability. In connection with these decisions, the company
recorded a restructuring charge of approximately $637,000 in the fiscal 2001
quarter.
Interest income for the fiscal 2001 quarter was approximately $18,000
compared to $22,000 for the fiscal 2000 quarter. Interest expense for the fiscal
2001 quarter was approximately $481,000 compared to approximately $432,000 in
the fiscal 2000 quarter. Interest expense increased as a result of an increase
in short-term borrowings to fund the increase in accounts receivable and
inventory resulting from the higher sales volume.
During the third quarter of fiscal 2000, the Company repurchased
approximately $1,229,000 of its 8% Subordinated Debentures issued in 1997 to
mature in April 2001. The transaction resulted in an extraordinary gain from the
early extinguishment of debt approximating $182,000.
The income tax benefit was approximately $490,000 in the fiscal 2001
quarter compared to a provision for income taxes of approximately $504,000 for
the fiscal 2000 quarter, a decrease of approximately $994,000 or 197.2%. The
effective tax rate was approximately 38.1% for the fiscal 2001 quarter and 39.4%
for the fiscal 2000 quarter. The estimated tax rate is based upon the most
recent tax rates available.
As a result of the above, net loss for the fiscal 2001 quarter was
approximately $797,000 compared to a net income of approximately $956,000 for
the fiscal 2000 quarter. Exclusive of the additional sales incentive, the
restructuring charge and certain other non-recurring expenses related to the
plant relocation in the fiscal 2001 quarter and the extraordinary item in the
fiscal 2000 quarter, net income decreased to $442,000 in the fiscal 2001 quarter
from $775,000 in the fiscal 2000 quarter. As a percentage of net sales, the net
loss was 3.0% in the fiscal 2001 quarter compared to 3.4% net income in the
fiscal 2000 quarter. Exclusive of non-recurring and extraordinary charges, net
income as a percentage of sales was 1.6% in the fiscal 2001 quarter compared to
2.7% in the fiscal 2000 quarter.
Liquidity and Capital Resources
Working capital as of November 30, 2000 decreased from approximately
$13,510,000 at February 29, 2000 to $4,960,000, a decrease of $8,550,000,
primarily as a result of the utilization of working capital to finance newly
acquired entities and fixed assets. Additionally, working capital was used to
purchase treasury stock and was adversely effected by the classification of
approximately $6,051,000 of subordinated debt which had previously been
classified as 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 2001 period
was approximately $1,726,000 compared to approximately $3,242,000 for the
comparable fiscal 2000 period. The decrease in cash provided by operating
activities was primarily the result of a decrease in income from operations
adjusted for non-cash charges for depreciation and amortization, offset by an
increase in inventories. Net cash used in investing activities was approximately
$2,731,000 compared to approximately $2,930,000 for the comparable fiscal 2000
period. The use results principally from the acquisition of certain newly
acquired entities and capital expenditures.
For the fiscal 2001 period, cash provided by financing activities was
approximately $1,652,000 compared to approximately $276,000 for the comparable
fiscal 2000 period. Cash provided was principally the result of an increase in
short term borrowings to fund working capital needs and certain of the newly
acquired entities, offset by repayments of long term and acquisition debt.
The Company has a revolving credit and term loan facility agreement
with a United States financial institution. This agreement provides for
borrowings of up to $10,000,000 for domestic purposes and borrowings of up to
$5,000,000 for the Company's foreign subsidiaries. In October 2000, the
financial institution granted the Company an additional $1,000,000 of permitted
borrowings for a period of sixty days. The facility permits borrowings against a
fixed
12
percentage of eligible accounts receivable and inventory. Interest is payable at
LIBOR (7.87% at November 30, 2000) plus 1.25% or an alternative currency rate
plus 1.25%. The revolving credit agreement terminates in July 2003 with respect
to the domestic borrowings and in June 2001 with respect to the foreign
borrowings. The credit facility is collateralized by accounts receivable,
inventory and equipment. Under the terms of the credit agreement, the Company is
required to maintain certain financial ratios and conditions. The credit
agreement also prohibits the Company from incurring certain additional
indebtedness, limits certain investments, advances or loans and restricts
substantial asset sales and capital expenditures. The terms of the Company's
credit facility also prohibit the payment of dividends, except with the lender's
consent. At November 30, 2000, the Company had approximately $808,000 available
for future borrowings, net of $355,000 in outstanding letters of credit.
Effective November 30, 2000, the agreement was amended to provide $1.5 million
of additional availability under the term loan facility. Under the terms of the
amendment, the rate will increase to Libor plus 1.5% to Libor plus 2.0%,
depending on the amount of borrowings to the Company's earnings before interest,
taxes, depreciation and amortization.
The Company's Chilean subsidiary has two revolving credit facility
agreements with a financial institution which permit borrowings of up to an
aggregate of $115,000 with interest at 18% per year. One of the facilities,
which permits total borrowings of up to $95,000, is secured by a standby letter
of credit given by the Company. The facilities expire on March 31, 2001. At
November 30, 2000, the Chilean subsidiary had approximately $15,000 available
for future borrowings under the credit facilities.
In connection with the acquisition of Roberts Consolidated Industries,
Inc., the Company issued $7,500,000 of subordinated debentures. These debentures
mature on April 1, 2001 and bear interest at 8%. They were recorded at their
fair value on the date of issuance in the amount of $6,515,000 and the discount
will be amortized over the life of the debentures. During the third quarter of
fiscal 2000, the Company repurchased approximately $1,229,000 of its debentures
at a discount resulting in an extraordinary gain from early extinguishment of
debt of approximately $181,000 in fiscal 2000. At November 30, 2000 and February
29, 2000, the remaining amortized balance of this obligation was $6,051,000 and
$5,891,000, respectively. In connection with the newly acquired entities, the
Company issued five promissory notes to the respective sellers. Two of the
notes, aggregating approximately $1,260,000, have been paid as of November 30,
2000 and were non-interest bearing. The third note, having an original principal
balance of $900,000, is payable in equal annual installments in October over a
three year period with interest at the Company's prevailing borrowing rate. The
fourth note, in the principal amount of $825,000, is payable in two installments
of $312,500 in December 2000 and 2001 and a final installment of $200,000 in
December 2003 with interest fixed at $12,500, $12,500 and $25,000, respectively.
The fifth note, in the original principal amount of $1,600,000, is payable
quarterly at $80,000 plus interest at 8% from October 1, 2000 through October 1,
2005.
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 note
from a Canadian lending institution of approximately $670,000 payable over 10
years at an interest rate, to be set annually (7.8% at the date of issuance).
On October 30, 1998, the Company entered into two interest rate swap
agreements with its primary lender. The interest rate swap agreements hedge the
Company's exposure on certain floating rate obligations in the aggregate
principal amount of $5.5 million. The purpose of the interest rate swaps is to
convert the Company's floating rate interest obligations to obligations having
an average fixed rate of 4.75% per annum for an average period of 1.75 years.
The fixing of interest rates reduces in part the Company's exposure to the
uncertainty of floating interest rates. The differentials paid or received by
the Company on the interest rate swap agreements are recognized as adjustments
to interest expense in the period incurred. For the nine and three months ended
November 30, 2000, the Company reduced interest expense by approximately $51,000
and $21,000, respectively as a result of the interest rate swap agreements. The
Company is exposed to credit loss in the event of nonperformance by any
counter-party to the interest rate swap agreements. The Company does not
anticipate nonperformance by such lender, and no material loss would be expected
13
from the non-performance of the lender. The first interest rate swap agreement
in the amount of $1,500,000 expired on December 23, 1999. The second interest
rate swap agreement in the amount of $4,000,000 expired on December 23, 2000. On
that date, the Company entered into a new interest rate swap agreement with its
primary lender in the amount of $10,000,000, to expire in December 2001. This
converts a portion of the Company's floating LIBOR rate obligation to an
obligation having a fixed LIBOR rate of 6%. All other terms of the interest rate
swap agreement remain the same as the expired agreements.
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 other than additional acquisitions and repayment of the debentures
maturing on April 1, 2001. The Company is in the process of seeking financing to
fund repayment of the debentures. There can be no assurance, however, that the
assumptions upon which the Company basis its future working capital and capital
expenditure requirements and the assumptions upon which it basis that funds will
be available to satisfy such requirements will prove to be correct. If these
assumptions are not correct, the Company's assessment of its liquidity position
could prove to be incorrect.
14
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
On October 30, 1998, the Company entered into two interest rate swap
agreements with its primary lender. The interest rate swap agreements hedge the
Company's exposure on certain floating rate obligations in the aggregate
principal amount of $5.5 million. The purpose of the interest rate swaps is to
convert the Company's floating rate interest obligations to obligations having
an average fixed rate of 4.75% per annum for an average period of 1.75 years.
The fixing of interest rates reduces in part the Company's exposure to the
uncertainty of floating interest rates. The differentials paid or received by
the Company on the interest rate swap agreements are recognized as adjustments
to interest expense in the period incurred. For the nine and three months ended
November 30, 2000, the Company reduced interest expense by approximately $51,000
and $21,000, respectively as a result of the interest rate swap agreements. The
Company is exposed to credit loss in the event of non-performance by any
counter-party to the interest rate swap agreements. The Company does not
anticipate nonperformance by such lender, and no material loss would be expected
from the non-performance of the lender. The first interest rate swap agreement
in the amount of $1,500,000 expired on December 23, 1999. The second interest
rate swap agreement in the amount of $4,000,000 expired on December 23, 2000. On
that date, the Company entered into a new interest rate swap agreement with its
primary lender in the amount of $10,000,000, to expire in December 2001. This
converts a portion of the Company's floating LIBOR rate obligation to an
obligation having a fixed LIBOR rate of 6%. All other terms of the interest rate
swap agreement remain the same as the expired agreements.
The Company averaged approximately $14,377,000 and $15,563,000 of debt
not covered by the interest rate swap agreements during the nine and three
months ended November 30, 2000. If interest rates would have increased by 10%,
the effect on the Company would have been an increase in interest expense of
approximately $105,000 and $113,000, respectively.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in litigation from time to time in the course
of its business. In the opinion of management, no material legal proceedings are
pending to which the Company or any of its property is subject.
On December 8, 2000 a complaint was failed in the Superior Court of the
State of California against Q.E.P.-O'Tool, one of the Company's subsidiaries by
Mateel Environmental Justice Foundation. The complaint alleges that the
defendant failed to give proper warnings to the residents of California that
handling of certain of the defendant's products would cause those residents to
be exposed to lead compounds, chemicals known to the State of California to
cause cancer, birth defects and other reproductive harm. The plaintiff seeks
damages based on a certain amount per day of exposure to these tools. The
Company is currently reviewing the facts and circumstances surrounding this case
but does not believe its outcome will have a material effect on the Company's
financial condition.
Roberts Consolidated has been named as a defendant in an amended
complaint filed in CARGILL, INC. ET AL. V. ABCO CONSTRUCTION ET AL., a lawsuit
initially filed in the United States District Court for the Southern District of
Ohio Western Division on January 29, 1998. The lawsuit, brought under CERCLA and
related state environmental laws, alleges that Roberts Consolidated and the
other defendants disposed of hazardous substances at a site located in Dayton,
Ohio. The plaintiffs are seeking monetary damages against the defendants,
primarily in a amount equal to their respective equitable share of the cost of
the environmental clean up of the site. The Company previously reported that
based on preliminary investigations, it believed that the entity identified as
Roberts Consolidated, named a defendant in this lawsuit, was neither the same
entity nor a predecessor to the entity acquired by the Company. The successor in
interest to the Roberts Consolidated which owned "the facility" in question,
responded to the initial complaint. To the Company's knowledge, this entity has
not responded to the amended complaint. Based upon its investigation to date,
the Company continues to believe that the entity identified as Roberts
Consolidated, named defendant in the amended complaint, was neither the same
entity nor a predecessor to the entity acquired by the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company *
3.2 By-Laws of the Company **
4.1 Specimen Common Stock Certificate *
4.1.1 Form of Warrant issued by the Company to the representative of the
underwriters of the Company's initial public offering *
27 Financial Data Schedule (SEC use only)
* Incorporated by reference to Exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (Reg. No. 333-07477).
** Incorporated by reference to Exhibit of the same number filed with the
Company's Annual Report on Form 10-K filed on May 28, 1997.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed by the Company during
its fiscal quarter ended November 30, 2000.
16
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 15, 2001 By: /s/ Lewis Gould
-----------------------------------------
Lewis Gould, Chairman, Chief Executive
Officer and Director (Principal Executive
Officer)
Dated: January 15, 2001 By: /s/ Marc P. Applebaum
-----------------------------------------
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
27 Financial Data Schedule
18