FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal quarter ended: May 31, 2001
Commission file number: 0-21161
Q.E.P. CO., INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2983807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1081 Holland Drive
Boca Raton, Florida 33487
(Address of principal executive offices)
(Zip code)
(561) 994-5550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of July 13, 2001: 3,381,618 shares of common stock, par value
$0.001 per share.
1
Q.E.P. CO., INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
May 31, 2001 (Unaudited) and February 28, 2001 (Audited)....................................... 3
Consolidated Statements of Income (Unaudited)
For the Three Months Ended May 31, 2001 and 2000............................................... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended May 31, 2001 and 2000............................................... 5
Notes to Consolidated Financial Statements............................................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations........... 9
Item 3 - Qualitative and Quantitative Disclosures about Market Risk...................................... 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................................................... 14
Item 2 - Changes in Securities........................................................................... 14
Item 6 - Exhibits and Reports on Form 8-K................................................................ 14
Signatures............................................................................................... 15
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2001 AND FEBRUARY 28, 2001
May 31, 2001 February 28, 2001
------------ -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................ $ 691,055 $ 397,817
Accounts receivable, less allowance for doubtful accounts
of approximately $437,000 and $662,000 as of May 31, 2001
and February 28, 2001, respectively................................................ 17,281,942 17,576,040
Notes receivable..................................................................... 21,844 21,845
Inventories.......................................................................... 21,004,488 20,132,585
Prepaid expenses..................................................................... 1,388,678 1,582,627
Deferred income taxes................................................................ 582,107 582,107
----------- -----------
Total current assets............................................................... 40,970,114 40,293,021
Property and Equipment, net............................................................. 6,869,457 7,155,327
Deferred income taxes................................................................... 873,568 1,019,095
Intangible assets, net.................................................................. 15,341,640 15,366,260
Notes receivable........................................................................ 32,120 33,886
Other assets............................................................................ 211,294 168,165
----------- -----------
Total Assets............................................................................ $64,298,193 $64,035,754
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit...................................................................... $14,751,514 $15,484,622
Current maturities of long term debt................................................. 2,082,790 2,016,385
Acquisition notes payable............................................................ 932,500 932,500
Accounts payable..................................................................... 9,279,777 8,947,842
Accrued liabilities.................................................................. 3,897,663 3,123,469
----------- -----------
Total current liabilities.......................................................... 30,944,244 30,504,818
Notes payable........................................................................... 4,506,587 5,120,566
Acquisition notes payable............................................................... 1,540,000 1,620,000
Subordinated long term debt............................................................. 3,863,542 4,500,000
Deferred income taxes................................................................... 177,621 177,621
Warrant put liability................................................................... 650,000 ---
Commitments and contingencies........................................................... --- ---
SHAREHOLDERS' EQUITY
Preferred stock, 2,500,000 shares authorized, $1.00 par value; 336,660 shares
issued and outstanding at May 31, 2001 and February 28, 2001....................... 336,660 336,660
Common stock, 20,000,000 shares authorized, $.001 par value;
3,381,618 shares issued and outstanding at May 31, 2001 and
February 28, 2001.................................................................. 3,381 3,381
Additional paid-in capital........................................................... 9,068,912 9,082,087
Retained earnings.................................................................... 14,351,469 13,758,547
Cost of stock held in treasury....................................................... (350,993) (350,993)
Accumulated other comprehensive income............................................... (793,230) (716,933)
----------- -----------
$22,616,199 $22,112,749
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................................. $64,298,193 $64,035,754
=========== ===========
The accompanying notes are an integral part of these statements.
3
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MAY 31, 2001 AND 2000
(UNAUDITED)
Three Months Ended
May 31, 2001 May 31, 2000
-------------------- --------------------
Net Sales....................................................................... $28,886,441 $31,605,457
Cost of goods sold.............................................................. 19,131,345 21,755,623
----------- -----------
Gross profit................................................................... 9,755,096 9,849,834
----------- -----------
Costs and expenses
Shipping....................................................................... 2,508,688 2,373,861
General and administrative..................................................... 2,692,423 2,701,421
Selling and marketing.......................................................... 2,990,161 2,782,993
Other (income) expense......................................................... (52,478) 25,656
----------- -----------
8,138,794 7,883,931
----------- -----------
Operating income............................................................... 1,616,302 1,965,903
Interest income................................................................. 191 32,125
Interest expense................................................................ (640,817) (474,842)
----------- -----------
Income before provision for income taxes........................................ 975,676 1,523,186
Provision for income taxes...................................................... (371,382) (580,341)
----------- -----------
Net income...................................................................... $ 604,294 $ 942,845
=========== ===========
Basic and diluted earnings per common share..................................... $ 0.18 $ 0.28
=========== ===========
The accompanying notes are an integral part of these statements.
4
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 2001 AND 2000
(UNAUDITED)
Three Months Ended
May 31, 2001 May 31, 2000
-------------------- --------------------
Cash flows from operating activities:
Net income..................................................................... $ 604,294 $ 942,845
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.................................................. 540,246 475,117
Deferred income taxes.......................................................... 145,527 188,158
Bad debt expense............................................................... --- 103,728
Changes in assets and liabilities, net of acquisitions:
Accounts receivable........................................................... 294,098 (714,009)
Inventories................................................................... (871,903) (735,804)
Other current assets.......................................................... 193,950 149,090
Other assets.................................................................. (192,655) (448,547)
Accounts payable and accrued liabilities...................................... 1,106,129 1,260,489
----------- ----------
Net cash provided by operating activities..................................... 1,819,686 1,221,067
----------- ----------
Cash flows from investing activities
Capital expenditures........................................................... (33,609) (142,602)
Acquisitions, net of cash acquired............................................. --- (437,065)
Purchase of license agreement.................................................. --- (200,000)
----------- ----------
Net cash used in investing activities........................................... (33,609) (779,667)
----------- ----------
Cash flows from financing activities:
Net repayment of lines of credit............................................... (733,108) (503,920)
Borrowings of long term debt................................................... 6,000,000 ---
Repayments of long term debt................................................... (6,580,654) (386,720)
Repayments of acquisition debt................................................. (80,000) ---
Payments received on notes receivable.......................................... 1,767 193,960
Proceeds from exercise of stock options........................................ --- 53,550
Purchase of common stock warrants.............................................. (13,175) ---
Dividends...................................................................... (11,372) (6,185)
----------- ----------
Net cash used in financing activities.......................................... (1,416,542) (649,315)
----------- ----------
Cumulative currency translation adjustment...................................... (76,297) (15,350)
----------- ----------
Net increase (decrease) in cash................................................. 293,238 (223,265)
Cash and cash equivalents at beginning of period................................ 397,817 829,063
----------- ----------
Cash and cash equivalents at end of period...................................... $ 691,055 $ 605,798
=========== ==========
Supplemental disclosure of cash flow information
Interest paid.................................................................. $ 585,003 $ 553,811
Income taxes paid.............................................................. $ 20,603 $ 403,550
The accompanying notes are an integral part of these statements.
5
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
---------------------
The accompanying financial statements for the interim periods are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the periods
presented. These financial statements should be read in conjunction with the
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations, contained in the
Annual Report on Form 10-K for the year ended February 28, 2001, of Q.E.P. Co.,
Inc. (the "Company") as filed with the Securities and Exchange Commission. The
February 28, 2001 balance sheet was derived from audited financial statements,
but does not include all disclosures required by accounting principles generally
accepted in the United States of America. The results of operations for the
three months ended May 31, 2001 are not necessarily indicative of the results
for the full fiscal year ending February 28, 2002.
Note 2. Inventories
-----------
The major classes of inventories are as follows:
May 31, 2001 February 28, 2001
------------ -----------------
Raw materials and work-in process...................... $ 4,400,072 $ 4,957,226
Finished goods......................................... 16,604,416 15,175,359
----------- -----------
$21,004,488 $20,132,585
=========== ===========
Note 3. Earnings per Share
------------------
Basic earnings per share is computed by dividing net income, after
deducting preferred stock dividends accumulated during the period, by the
weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share is computed by dividing net income, after
deducting preferred stock dividends accumulated during the period, by the
weighted average number of shares of common and dilutive common stock equivalent
shares outstanding during the period. Diluted common stock equivalent shares
consist of stock options and warrant common stock equivalent shares which are
not utilized when the effect is antidilutive.
For the three months ended May 31, 2001 and 2000 and as adjusted for
the stock split (see Note 4), the weighted average number of basic shares of
common stock outstanding amounted to 3,381,618 and 3,360,118, respectively. For
the three months ended May 31, 2001 and 2000, the weighted average number of
diluted shares of common stock outstanding amounted to 3,381,618 and 3,388,067
respectively.
Note 4. Equity
------
On June 6, 2000, the Board of Directors declared a five for four stock
split of the Company's common stock, effected in the form of a stock dividend
that was paid on August 1, 2000. As a result of this action, approximately
673,000 shares were issued to shareholders of record on July 17, 2000. Par value
of the common stock remained at $0.001 per share and accordingly, $673 was
transferred from retained earnings to common stock.
6
The effect on earnings per share was a reduction of $0.04 and $0.07
per share for the three months ended May 31, 2001 and 2000, respectively. All
references to the number of common shares and per common share amounts have been
restated to give retroactive effect to the stock split for all periods
presented.
Note 5. Comprehensive Income
--------------------
The Company records comprehensive income in accordance with Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS 130
requires foreign currency translation adjustments to be included in other
comprehensive income. During the first quarter of fiscal 2001 and fiscal 2000,
the Company's comprehensive income totaled $527,997 and $927,495, respectively.
Note 6. License Agreement
-----------------
Effective May 15, 2000, the Company entered into an agreement to
license the distribution rights of tackless carpet strip to U.S. flooring
products distributors. Under the terms of the agreement, the Company will
receive $2,750,000 at a predetermined rate based on cartons of tackstrip sold.
The Company is guaranteed a minimum of $400,000 per year. In addition, the
Company will continue to sell tackless carpet strip to the Home Center and
International markets. For the three months ended May 31, 2000, the Company sold
approximately $2,935,000 of tackless carpet strip to U.S. flooring products
distributors. There were no sales of this product to these distributors for the
three months ended May 31, 2001.
Note 7. Non-cash Investing and Financing Activities
-------------------------------------------
During the three months ended May 31, 2000, the Company made two
strategic acquisitions. In connection with the acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $512,774
Cash paid 437,065
--------
Liabilities assumed $ 75,709
========
Issuance of notes to related sellers $106,249
========
Note 8. Debt Refinancing
----------------
On April 5, 2001, the Company entered into a new $4,500,000
subordinated credit facility with HillStreet Fund LP. This facility bears an
interest rate of 15% and matures on April 5, 2007. Beginning July 1, 2005, the
Company is required to make equal quarterly principal payments through April 5,
2007. The agreement also provides for an additional 3% interest if the Company
does not meet certain financial covenants. In addition, the Company issued
325,000 10-year warrants which have an exercise price of $3.63 per share (the
"Put Warrants"). These Put Warrants can be put to the Company on and after April
5, 2006 based on criteria set forth in the warrant agreement. In addition, the
Company may call these Put Warrants on and after April 5, 2007 based on the same
criteria. The Company has recorded a liability for the Put Warrants based on an
independent appraisal. Changes to the future fair value of the Put Warrants will
be recorded in accordance with SFAS 133. The resulting discount of the
subordinated credit facility will be amortized over the life of the debt.
Further, in April 2001, the Company obtained an additional term loan
from its primary lending institution. This loan, in the amount of $1,500,000, is
payable in equal quarterly installments
7
commencing July 1, 2001 and ending on April 1, 2003. The interest rate for this
loan is LIBOR plus 2.75% and is partially guaranteed by the Chairman and Chief
Executive Officer of the Company.
Note 9. Future Effects of Recently Issued Accounting Pronouncements
-----------------------------------------------------------
In 1998, SFAS No. 133, "Accounting of Derivative Instruments and
Hedging Activities," was issued and in June 2000, SFAS No. 138 was issued, which
amends and clarifies certain guidance in SFAS No. 133. These statements
establish accounting and reporting standards for derivative instruments and must
be adopted no later than fiscal 2002. The statement requires all derivatives to
be recognized as assets or liabilities on the balance sheet and measured at fair
value. Changes in the fair value of derivatives should be recognized in either
net income or other comprehensive income, depending on the designated purpose of
the derivative. The Company implemented SFAS No. 133 in the first quarter of
fiscal 2002 and adoption did not have a significant impact on the Company's
financial position or results of operations.
In September 2000, the Emerging Issues Task Force ("EITF") reached a
final consensus on EITF Issue 00-10, "Accounting for Shipping and Handling
Costs" and the related revenue. The Company adopted EITF 00-10 in fiscal 2001
and classifies all shipping and handling costs as a separate operational
expense.
The EITF issued EITF 00-22, "Accounting for "Points" and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to Be Delivered in the Future." This guidance requires that
obligations for cash rebates offered to customers who achieve specified
cumulative levels of revenue transactions be recognized as a reduction of
revenue based on a systematic and rational allocation to each of the underlying
revenue transactions that result in plain progress towards the rebate. The EITF
also issued EITF 00-25, "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products."
This issue addresses when consideration from a vendor to a retailer (a) in
connection with the retailer's purchase of the vendor's products or (b) to
promote sales of the vendor's products by the retailer should be classified in
the vendor's income statement as a reduction of revenue. The Company adopted
EITF No. 00-22 and 00-25 in the first quarter of 2002 and has determined that it
is currently in compliance with the consensuses. Further, such adoption did not
have a significant impact on the Company's financial position or results of
operations.
Note 10. Presentation
------------
Certain amounts in the May 31, 2000 presentation have been
reclassified to conform to the May 31, 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.
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 similar anticipatory expressions, are generally forward-
looking and are made only as of the date of this report. 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 anticipation of the
performance by the lender under the interest rate swap agreements and its
assessment of the effect of any non-performance by the lender under the interest
rate swap agreements, the 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 newly acquired entities, the Company's
dependence upon certain key personnel and its ability to successfully integrate
new management personnel into the Company, the Company's ability to accurately
predict the number and type of employees required to conduct its European
operations and the compensation required to be paid to such personnel, any
increase in the level of current taxes or the imposition of additional taxes in
connection with the Henderson, Nevada facility, its ability to manage its
growth, the risk of economic and market factors affecting the Company or its
customers and other risks and uncertainties described elsewhere herein.
Results of Operations
Three months ended May 31, 2001 compared to three months ended May 31,
2000
Net sales for the three months ended May 31, 2001 (the "fiscal 2002
period") were approximately $28,886,000, compared to $31,605,000 for the three
months ended May 31, 2000 (the "fiscal 2001 period"), a decrease of $2,719,000
or 8.6%. Sales to the Company's home center customer base increased; however,
this increase was offset by a decline in sales to the specialty distributor
customer base resulting from the Company's decision to discontinue the sale of
tackless carpet strip to these customers. As described elsewhere herein, the
Company licensed the rights of sale of this product to the specialty
distributors to a third party. Sales of tackless carpet strip for the fiscal
2001 period amounted to approximately $2,935,000. Selling prices remained
relatively stable during the comparable periods.
Gross profit for the fiscal 2002 period was approximately $9,755,000,
compared to $9,850,000 for the fiscal 2001 period, a decrease of $95,000 or
1.0%. As a percentage of net sales, gross profit increased to 33.8% in the
fiscal 2002 period from 31.2% in the fiscal 2001 period. This increase resulted
principally from the discontinuance of the sale, to domestic distributors, of
the low margin tackstrip
9
product and the benefits derived from the Company's ability to lower its
material cost on certain of its product lines. These increases to gross profit
were slightly offset by additional domestic customer incentives and a reduction
in gross margin at the foreign subsidiaries.
Shipping expenses for the fiscal 2002 period were approximately
$2,509,000, compared to $2,374,000 for the fiscal 2001 period, an increase of
$135,000 or 5.7%. As a percentage of net sales, these expenses increased to 8.7%
in the fiscal 2002 period from 7.5% in the fiscal 2001 period, primarily as a
result of an increase in freight rates charged by common carriers and expenses
incurred in the repositioning of the Company's inventory among its warehouses.
The actual increase is a result of the higher sales volume to the Company's home
center customer base and an absorption, by the Company, of a higher percentage
of freight costs to its domestic distributors.
General and administrative expenses for the fiscal 2002 period were
approximately $2,692,000, compared with $2,701,000 for the fiscal 2001 period, a
decrease of $9,000 or 0.3%. As a percentage of net sales, these expenses
increased to 9.3% in the fiscal 2002 period from 8.5% in the fiscal 2001 period
principally due to the absorption of certain fixed costs over a reduced sales
volume. A decline in the general and administrative operating expenses was
offset by increased amortization resulting from companies acquired in fiscal
2000.
Selling and marketing costs for the fiscal 2002 period were
approximately $2,990,000, compared to $2,783,000 for the fiscal 2001 period, an
increase of $207,000 or 7.4%. As a percentage of net sales, these expenses
increased to 10.3% in the fiscal 2002 period from 8.8% in the fiscal 2001 period
principally as a result of an increase in commission rates paid to the Company's
sales force and an increase in marketing allowance rates to one of the Company's
major customers. The actual increase was primarily due to increased commissions
resulting from the higher sales volume principally to home center customers and
an increase in special marketing incentives to one of the Company's major
customers.
Interest income declined $32,000 and interest expense increased
$166,000, respectively during the fiscal 2002 period compared to the fiscal 2001
period. Interest expense increased primarily as a result of the increase in
borrowings associated with the increase in inventory and accounts receivable
resulting from higher sales volumes and funds expended for prior acquisitions.
Additionally, there was an increase in the borrowing rate applied to the
Company's debt.
Provision for income taxes was approximately $371,000 in the fiscal
2002 period compared to $580,000 in the fiscal 2001 period, a decrease of
$209,000 or 36.0%. The estimated effective tax rate was approximately 38.1% for
the fiscal 2002 and fiscal 2001 periods. The estimated effective tax rate is
based upon the most recent effective tax rates available.
Net income for the fiscal 2002 period decreased to $604,000 from
$943,000 in the fiscal 2001 period, a decrease of $339,000 or 35.9%. Net income
as a percentage of net sales decreased to 2.1% in fiscal 2002 compared to 3.0%
in fiscal 2001, primarily for the reasons discussed above.
Liquidity and Capital Resources
Working capital as of May 31, 2001 increased to approximately
$10,026,000 from approximately $9,788,000 at February 28, 2001, an increase of
$238,000 primarily as a result of an increase in the Company's operations offset
by a net payment of long term debt. Any cash in excess of anticipated
requirements is invested in commercial paper or overnight repurchase agreements
with a financial institution. The Company states the value of such investments
at market price and classifies them as cash equivalents on its balance sheet.
10
Net cash provided by operating activities during the fiscal 2002
period was $1,820,000 compared to $1,221,000 during the fiscal 2001 period. The
change was primarily due to a decrease in the Company's operations offset by a
decrease in accounts receivable. Net cash used in investing activities was
$34,000 in the fiscal 2002 period compared to $780,000 for the fiscal 2001
period. The decrease was primarily due to expenses associated with acquisitions
in the fiscal 2001 period.
Net cash used in financing activities was $1,417,000 during the fiscal
2002 period compared to $649,000 in the fiscal 2001 period due primarily to
repayments of lines of credit, long term debt and subordinated debt.
The Company has a revolving credit and term loan facility agreement
with a United States financial institution. This agreement, which was amended on
April 5, 2001, provides for borrowings of up to $18,000,000 against a fixed
percentage of eligible accounts receivable and inventory. Interest is payable
based on a sliding scale depending on the Company's senior debt to EBITDA
ranging from LIBOR plus 1.75% to LIBOR plus 2.5%. This facility terminates in
July 2003 and is collateralized by substantially all of the Company's assets.
Under the terms of the credit agreement, the Company is required to maintain
certain financial ratios and conditions. The credit agreement also prohibits the
Company from incurring certain additional indebtedness, limits certain
investments, advances or loans and restricts substantial asset sales and capital
expenditures. The terms of the Company's credit facility also prohibits the
payment of dividends, except with the lender's consent. Prior to this amendment
the Company was allowed to borrow up to $16,500,000 based on the same fixed
percentage of eligible accounts receivable and inventory. Interest was charged
on a sliding scale. As of May 31, 2001, interest was at LIBOR (4.08 at May 31,
2001) plus 2.00%. At May 31, 2001, the Company had $3,043,000 available for
future borrowings under its existing facilities. 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 August 31, 2001. At May 31, 2001 the Chilean subsidiary had
approximately $13,000 available for future borrowings under the credit facility.
The Company's Australian subsidiary also has an overdraft facility which allows
it to borrow against a certain percentage of inventory and receivables. At May
31, 2001 the maximum permitted borrowing was approximately $300,000 and was
fully utilized. In connection with the acquisition of Roberts Consolidated
Industries, Inc., the Company issued $7,500,000 of subordinated debentures.
These debentures matured and were paid in April 2001 and bore interest at 8%.
They were recorded at their fair value on the date of issuance in the amount of
$6,515,000 and the discount was amortized over the life of the debentures. On
April 5, 2001 the Company entered into a new $4,500,000 subordinated credit
facility with HillStreet Fund LP. This facility bears an interest rate of 15%
and matures in six years. Equal quarterly payments are required beginning in
year five. The agreement also provides for an additional 3% interest if the
Company does not meet certain financial covenants. In 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 after the fifth year based on criteria
set forth in the warrant agreement. In addition, the Company may call these
warrants after the sixth year based on the same criteria. Further, in April
2001, the Company obtained an additional term loan from its primary lending
institution. This loan, in the amount of $1,500,000, is payable in equal
quarterly installments commencing July 1, 2001 and ending on April 1, 2003. The
interest rate for this loan is LIBOR plus 2.75% and is partially guaranteed by
the Chairman and Chief Executive Officer of the Company.
In connection with certain acquisitions, the Company issued five notes
to the respective sellers. Two of the notes, aggregating approximately
$1,260,000, were paid in the second quarter of fiscal 2001 and were non-interest
bearing. The third note, having an original principal balance of $900,000, is
payable in equal installments over a three year period with interest at the
Company's prevailing borrowing rate. The amount outstanding on this note at May
31, 2001 is $600,000. The fourth note, in the principal amount of $825,000, is
payable in three installments of $312,500 in December 2000 and
11
2001 and $200,000 in December 2003 with interest fixed at $12,500, $12,500 and
$25,000, respectively. The fifth note in the original principal amount of
$1,600,000, is payable quarterly at $80,000 plus interest at 8% from October 1,
2000 through October 1, 2005.
On December 23, 2000, the Company entered into an interest rate swap
agreement with its primary lender. The interest rate swap agreement hedges the
Company's exposure on certain floating rate obligations in the aggregate
principal amount of $10,000,000. The purpose of the interest rate swap is to
convert the Company's floating rate interest obligations to obligations having a
fixed rate of 6.0% per annum for a one-year period. Prior to this interest rate
swap, the Company had one with the same institution that matured in December
2000. The fixing of the interest rates reduces in part the Company's exposure to
the uncertainty of floating interest rates. The differential paid or received by
the Company on the interest rate swap agreement is recognized as an adjustment
to interest expense in the period incurred. For the three months ended May 31,
2001, the Company reduced interest expense by approximately $12,000 as a result
of the interest rate swap agreements that were in place during that period. The
Company is exposed to credit loss in the event of non-performance by any
counter-party to the interest rate swap agreement. The Company does not
anticipate rate non-performance by such lender, and no material loss would be
expected from the non-performance of the lender.
The Company believes its existing cash balances, internally generated
funds from operations and its available bank lines of credit will provide the
liquidity necessary to satisfy the Company's working capital needs, including
the growth in inventory and accounts receivable balances, and will be adequate
to finance anticipated capital expenditures and debt obligations for the next
twelve months. There can be no assurance, however, that the assumptions upon
which the Company bases its future working capital and capital expenditure
requirements and the assumptions upon which it bases that funds will be
available to satisfy such requirements will prove to be correct. If these
assumptions are not correct, the Company's assessment of its liquidity position
could prove to be incorrect.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES FROM MARKET RISK
On December 23, 2000, the Company entered into an interest rate swap
agreement with its primary lender. The interest rate swap agreement hedges the
Company's exposure on certain floating rate obligations in the aggregate
principal amount of $10,000,000. The purpose of the interest rate swap is to
convert the Company's floating rate interest obligations to obligations having a
fixed rate of 6.0% per annum for a one-year period. Prior to this interest rate
swap, the Company had one with the same institution that matured in December
2000. The fixing of the interest rates reduces in part the Company's exposure to
the uncertainty of floating interest rates. The differential paid or received by
the Company on the interest rate swap agreement is recognized as an adjustment
to interest expense in the period incurred. For the three months ended May 31,
2001, the Company reduced interest expense by approximately $12,000 as a result
of the interest rate swap agreements that were in place during that period. The
Company is exposed to credit loss in the event of non-performance by any
counter-party to the interest rate swap agreement. The Company does not
anticipate rate non-performance by such lender, and no material loss would be
expected from the non-performance of the lender.
The Company averaged approximately $10,546,000 of variable rate debt
not covered by the interest rate swap agreements during the quarter ended May
31, 2001. If interest rates would have increased by 10%, the effect on the
Company would have been an increase in interest expense of approximately
$18,000.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There have been no material developments in any litigation proceedings
to which the Company is a party since the Company's report on Form 10-K was
filed with the Securities and Exchange Commission on May 29, 2001.
Item 2. Changes in Securities
---------------------
On April 5, 2001, in connection with the consummation of a loan
transaction, the Company issued to one of its lenders warrants to purchase up to
325,000 shares of the Company's common stock at an exercise price of $3.63 per
share. The warrants are exercisable until April 5, 2011. The issuance was exempt
from registration under Section 4(2) of the Securities Act of 1933, based on
representations that the Company received from the lender.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) List of Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of the Company*
3.2 By-Laws of the Company**
4.1 Specimen Common Stock Certificate*
4.1.1 Form of Warrant issued by the Company to the representative of the
underwriters of the Company's initial public offering*
* Incorporated by reference to Exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (Reg. No. 333-07477).
** Incorporated by reference to Exhibit of the same number filed with the
Company's Annual Report on Form 10-K filed on May 8, 1997.
_______________
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed by the Company
during its fiscal quarter ended May 31, 2001.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Q.E.P. CO., INC.
Dated: July 13, 2001 By: /S/ Lewis Gould
--------------------------------------
Chairman, Chief Executive Officer and
Director (Principal Executive Officer)
Dated: July 13, 2001 By: /S/ Marc Applebaum
--------------------------------------
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
15