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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the
transition period from _____________ to _____________
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)
Registrant's telephone number, including area code: (561) 994-5550
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of exchange
NONE on which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting common stock held by non-affiliates as of
May 4, 2001 is $5,795,423, computed by reference to the closing price for such
shares on the NASDAQ National Market System as of such date. The registrant does
not have any authorized or issued non-voting common equity securities.
The number of shares outstanding of each of the registrant's classes of common
stock as of May 4, 2001 is: 3,381,618 shares of Common Stock, par value $0.001
per share.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement which the Registrant will file with the
Securities and Exchange Commission in connection with the Registrant's Annual
Meeting of Stockholders to be held on July 13, 2001 are incorporated by
reference in Part III of this Form 10-K.
1
PART I
Item 1. Business
General
Founded in 1979, Q.E.P. Co., Inc. (the "Company" or "Q.E.P.") manufactures,
markets and distributes a broad line of specialty tools and flooring related
products for the home improvement market in the United States and countries
throughout the world. Under brand names including Q.E.P.(TM), O'TOOL(TM) and
ROBERTS(TM), 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. Q.E.P.'s products include trowels, floats, tile
cutters, wet saws, spacers, nippers, pliers, carpet trimmers and cutters, carpet
adhesives, seaming tape, tack strip, knives, dryset powders, grouts and
abrasives. These products are sold to home improvement retailers, including
national and regional chains such as Home Depot and Lowe's, specialty
distributors to the hardware, construction, flooring and home improvement trades
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.
The Company continues to experience growth in net sales, as adjusted in the
current year for the Company's licensing of its domestic tack strip business
described elsewhere herein, which management attributes to (i) strategic
acquisitions, (ii) growth experienced by the Company's customers within the home
improvement market, particularly among national and regional home center
retailers such as Home Depot and Lowe's, (iii) the introduction of new products
and the Company's success in cross-marketing its products among its channels of
distribution, (iv) the Company's expansion of its customer base and market share
through sales to additional home improvement retailers, distributors and
Original Equipment Manufacturers ("OEMs") and (v) growth of the home improvement
market as a whole.
The Company made several strategic acquisitions during the year ended February
29, 2000, as part of its plan to enhance its leadership in the worldwide
flooring market. On June 17, 2000, the Company acquired Neon Australia Pty,
Ltd., a leading Australian manufacturer of flooring tapes and metals for the
carpet industry. On July 20, 1999, the Company acquired Novafonte, Limitada, a
distributor, manufacturer and installer of ceramic tile and ceramic tile
accessories located in Santiago, Chile. On July 22, 1999, the Company acquired
an additional Australian flooring company, Accessories Marketing Pty, Ltd., the
largest distributor of tools and installation products for all types of flooring
in the Australian marketplace. On September 21, 1999, the Company acquired
Boiardi Products Corp. of Little Falls, NJ. Boiardi is a manufacturer of a full
line of thin-set mortars, grouts, self-leveling concrete toppings and
crack-suppressing waterproof membranes used in the flooring industry. On
September 30, 1999, the Company acquired Trade Mates Pty, Ltd. of Australia, a
distributor of ceramic tile tools in the Australian marketplace. On December 6,
1999, the Company acquired Zocalis, SRL, an Argentinean company located in
Buenos Aires. Zocalis is a manufacturer of ceramic borders and trim.
Collectively, these acquisitions are referred to as the "Fiscal 2000
acquisitions" elsewhere herein.
The Company's acquisitions in fiscal 2001 were predominantly associated with
expanding the Company's position as a manufacturer of dryset powder and grouts
used in ceramic tile installations. To that end, the Company acquired Stone
Mountain Manufacturing of Georgia and Stone Mountain Manufacturing of Florida
from the same seller. The Company also acquired the Australian-based Southern
Tile Agency PTY, a manufacturer of quality accessories used for the installation
of ceramic tile and a New Zealand distributor.
Collectively, Southern Tile Agencies Ltd. Pty., Stone Mountain Manufacturing of
Georgia and Florida and the Fiscal 2000 acquisitions are referred to elsewhere
herein as the "newly acquired entities."
Market Overview
The Company is a supplier of specialty flooring installation products and sells
to the home improvement market. According to the latest industry information
published by the National Home Center News ("NHCN"), the United States retail
home improvement market generated retail sales of over $200 billion in 1999 with
home centers accounting for approximately $128 billion. NHCN projects that
flooring products accounted for approximately 7% of sales in 1999. Estimates are
that by 2004, the floor covering industry will have grown into a $62 billion
business, up from $40 billion in 1998. Additionally, it is projected that by
2006 Americans will spend 58% more per capita on floor coverings than they do at
the present time. The Company believes that growth in the home improvement
market is being driven by several factors, including (i) aging
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of the United States housing stock which requires greater repair and maintenance
expenditures, (ii) increased housing turnover of both new and existing homes,
(iii) favorable demographic trends as "baby boomers," are now reaching the 37 to
56 year old age category, and such age category historically accounting for the
largest home improvement expenditures of any age group, and (iv) changes in
consumer preferences, which have caused an increase in the median size of new
homes and which have contributed to demand for remodeling and expansion of older
homes.
Within the home improvement market, distribution channels have continued to
consolidate as a result of the success of the warehouse home center format used
by large home improvement retailers. The increasing dominance of national home
improvement retailers results from their ability to offer broad product lines,
project advice and orientation, competitive pricing, aggressive promotions and
large-format stores. Estimates published by the NHCN indicate that the 10
largest retailers accounted for approximately $70.3 billion of all home
improvement sales in 1999. Based on data available to the Company, the primary
beneficiaries of this consolidation among home improvement retailers have been
the top two or three companies (ranked by annual sales volume). Thus, while the
home improvement market's retail sales have expanded, the market is being
increasingly dominated by the largest retailers.
The Company's two largest customers, Home Depot and Lowe's, experienced compound
annual sales growth rates of 19.0% and 19.5%, respectively, from 1999 to 2000,
according to their published financial reports and both have announced plans to
continue increasing the number of stores each operates. As consolidation
continues among home improvement retailers, the Company expects that sales of
the largest national and regional home improvement retailers will continue to
increase at greater rates than the rate of sales growth in the overall market.
The Company expects that the growth trends in the specialty flooring segment of
the home improvement market and among its customer base will directly affect the
Company's ability to generate growth in its sales and net income, its expansion
strategy and the nature of its sales and marketing initiatives.
Business Strategy
The Company's strategy is to enhance its position as a leading manufacturer and
distributor of specialty tools and related products by introducing new products
and cross-selling products among its channels of distribution, expanding market
share by obtaining new customers, and capitalizing on expected growth of its
largest customers and of the home improvement market as a whole. Key elements of
the Company's strategy include:
Pursue Additional Strategic Acquisitions. Through its acquisitions, detailed
elsewhere herein, the Company has broadened its product lines, increased its
customer base and increased its manufacturing and marketing capabilities. The
Company intends to seek and evaluate acquisitions of both domestic and worldwide
specialty tool and adhesive manufacturers, distributors and other companies
whose products, distribution channels and brand names are complimentary to those
of the Company and which will offer further opportunities for product cross
selling, expansion of manufacturing and marketing operations and the addition of
new customers.
Increase Sales By Expanding Product Lines and Adding New Customers. The Company
seeks to expand its product lines by introducing new and innovative products
which can be marketed to the Company's existing customer base. Through its
acquisitions, the Company has expanded its customer base, the number of products
available and its line of flooring installation products. In addition to
expanding product offerings through acquisitions, the Company intends to
internally develop and offer products in response to customer demands. The
Company believes that broadening its product lines will make it a more
attractive supplier to the major home improvement retailers and specialty
distributors, thereby increasing the Company's sales and market penetration.
Capitalize on Cross-Selling Opportunities. The Company believes that there are
significant opportunities for "cross selling" its products among its existing
markets and channels of distribution. As part of its acquisition strategy, the
Company seeks to identify acquisition candidates with complementary product
lines and to "cross sell" acquired product lines to its existing customer base
and its existing product lines to the customers of the acquired business.
Expand Foreign Market Presence. Management believes that the international
markets provide a significant opportunity to increase sales of its products.
Through the acquisition of Roberts Holland, Novafonte Limitada, Neon Australia,
Accessories Marketing, Trade Mates and Zocalis, the Company acquired additional
manufacturing, warehousing and
3
distribution facilities in Europe, Australia, New Zealand, Chile and Argentina.
During fiscal 2000, the Company began selling to home centers and major ceramic
retailers in Europe, Australia and South America. In addition, the Company has
implemented foreign sales and marketing programs designed to increase the
Company's presence in South America and the Pacific Rim.
Enhance Manufacturing Capabilities. The Company currently has approximately
372,000 square feet of manufacturing capability located throughout the United
States, Canada, Holland, Australia and South America. The Company estimates that
in fiscal 2001, it manufactured approximately 50% of its QEP and ROBERTS
product lines.
Products
The Company manufactures, markets and distributes a broad line of over 4,000
specialty tools and flooring related products. The Company's products are
offered under brand names including Q.E.P.(TM), O'TOOL(TM) and ROBERTS(TM) and
are used primarily for surface preparation and installation of ceramic tile,
carpet and marble.
The Company manufactures and distributes adhesives, grouts, mortars, dry set
powders, carpet seaming tape and an assortment of carpet installation tools as
well as floats, tile cutters, trowels, electric saws, nippers and other products
to the ceramic tile industry. These products are sold to both distributors and
do it yourself customers. Although the Company manufactures and distributes over
4,000 products, a majority of the Company's sales are to customers who purchase
between 20 and 150 individual stock-keeping units. As the Company seeks to
broaden its product lines, the competition for limited shelf space available at
home improvement retailers for specialty tools and related products may limit
sales of existing or newly introduced products.
The Company maintains a research and development program through which it seeks
to identify new product opportunities within its primary markets. Methods by
which the Company seeks to identify product opportunities include soliciting
product feedback from customers through its outside sales force and
manufacturers' representatives, review of product brochures and catalogs issued
by foreign and domestic manufacturers of specialty tools, review of product
concepts with buyers employed by its customers, and attendance at industry trade
shows and conventions at which new product concepts are introduced and
discussed. The Company also considers participation in joint ventures and
evaluation of product samples to be an important part of its effort to identify
new product opportunities. The Company maintains a product quality control
program primarily to verify the quality of its existing products and to develop
ideas for additional products or enhancements to existing products.
Relationship With Major Customers
In 1983, the Company began selling products to Home Depot, which is currently
the largest home improvement retailer in the world based on annual sales volume.
In 1993, the Company added Lowe's as a customer, which is now the second largest
home improvement retailer in the world. Home Depot and Lowe's are the Company's
two largest customers accounting for 40.9% and 9.4% of the Company's fiscal 2001
net sales, respectively.
Because of the importance of home improvement retailers to its business, the
Company has, in consultation with its major customers, developed customer
service programs to ensure that the specific needs of these customers are given
a high priority with direct attention from senior officers of the Company.
Features of the Company's customer service programs for its major customers
include providing a range of in-store services, such as, assistance with
inventory, maintenance of product displays, introduction of new products,
maintaining inventories of tools and related products in multiple locations to
permit rapid shipping, delivering orders promptly, holding education classes for
retail store personnel, packaging with multilingual labels, prepaying delivery
for product shipments with minimum purchase requirements, participating in
cooperative promotions and special sales events, providing product research for
buyers, operating a customer service hotline, providing parts and repair
service, extension of advertising allowances, accepting orders electronically
and billing through electronic data interchange, bar coding for each individual
stock keeping unit, and incorporating anti-theft tags in packaging. The Company
believes that its major customers place considerable value on service and
promotional support and frequently evaluates its service and promotional
activities in an effort to serve its customers more effectively.
The Company believes that the consolidation among home improvement retailers
will continue and that the national and
4
large regional home improvement retailers will continue to increase their market
share in the near future. Home Depot and Lowe's have announced plans to increase
significantly the number of stores each operates over the next several years. As
a result, the Company expects the percentage of its sales to these customers to
continue to be significant. The Company has also expanded its customer base in
other areas through its newly acquired entities.
Manufacturing and Suppliers
The Company estimates that in fiscal 2001 it manufactured approximately 50% of
its QEP & ROBERTS product lines. The Company manufactures adhesives, carpet
seaming tape and carpet installation tools at its main manufacturing facility in
Mexico, Missouri. Flooring adhesives are produced at the facility in Bramalea,
Ontario, Canada and Sliedrecht, Holland. The majority of the Company's
manufactured ceramic tile tools are produced in Mexico, Missouri. Plastic tile
spacers are manufactured at the facility in Boca Raton, Florida. Grouts and
related products are manufactured at the Company's New Jersey, Georgia, Ft.
Pierce, Florida and Chilean facilities. In Australia, the Company manufactures
accessories used for the installation of ceramic tile. Such tile accessories are
also manufactured in Chile. Ceramic trim is manufactured in Argentina.
The Company purchased finished products and components from approximately 250
different suppliers in fiscal 2001. Although the Company believes that multiple
sources of supply exist for nearly all of the products and components purchased
from outside suppliers and generally maintains at least two sources of supply
for each item purchased, interruptions in supply or price changes in the items
purchased by the Company could have a material adverse effect on the Company's
operations.
Distribution, Sales and Marketing
The Company's specialty tools and related products are currently sold through
four distinct distribution channels: (i) the Company's sales staff; (ii)
independent manufacturing representatives; (iii) an in-house telemarketing sales
force; and (iv) outside salaried and commissioned sales representatives.
Management estimates that sales through its primary distribution channels in
fiscal 2001 were as follows: 50.6% to national and regional home improvement
retailers; 47.1% to specialty distributors and 2.3% to OEMs and other specialty
retailers.
The Company maintains an in-house creative art department through which it
produces and develops color product catalogs, signage, point of purchase
materials and distinctive packaging to enhance sales per square foot at the
retail level and to reinforce the Company's brand images. The Company has
developed a direct mail marketing program under which approximately 3,500
product advertising flyers are mailed to customers, usually on a bimonthly
basis.
The Company's marketing and sales representatives, or its manufacturers'
representatives, conduct regular visits to many customers' individual retail
stores. In addition, the Company or its sales representatives provides product
knowledge classes for retail store personnel. The Company also evaluates the
product mix at its customers' locations from time to time with a view toward
changing the product mix, if necessary, to increase sales per square foot. When
the Company secures a new customer, the Company generally resets all displays
and assists store personnel in becoming familiar with the Company's product
line.
Competition
The Company believes that competition in the home improvement flooring product
market is based primarily on product quality, delivery capabilities, brand name
recognition, availability of retail shelf space and price. The Company believes
that its competitive strengths are the quality of its products, its wide range
of products, its delivery capabilities, and the brand recognition. The Company
faces competition largely on a product-by-product basis from numerous
manufacturing and distribution companies. The Company believes that the
diversity of its product portfolio will allow it to compete effectively with its
competitors, although some of such competitors may sell larger quantities of a
particular product than the Company.
The Company is aware of a number of competitors, many of which are foreign and
may have greater financial, marketing and other resources than the Company. The
Company's foreign sales, including Canada, accounted for approximately 22.8% of
total sales during fiscal year 2001. Fiscal 2001 sales generated by the
Company's Canadian subsidiary were
5
7.9%, its Holland subsidiary 7.8%, its Australian subsidiaries 3.6%, its South
American subsidiaries 1.8% and 1.7% to foreign customers from its domestic
subsidiaries. The Company is continuing to penetrate more foreign markets and,
as a result, the Company may experience competition from foreign companies,
which could adversely affect the Company's gross margins on its foreign sales.
Certain of the Company's larger customers have in the past contacted one or more
of the Company's foreign suppliers to discuss purchasing home improvement
products directly from these suppliers. Although the Company believes that its
diversified product line, brand recognition and customer service will continue
to offer benefits not otherwise available to the Company's customers from
foreign manufacturers, the Company could experience competition from one or more
foreign manufacturers which now serve as suppliers to the Company. If one or
more of the Company's larger customers were to begin purchasing products
previously supplied by the Company directly from foreign manufacturers, the
Company's business would be adversely affected. Increased competition from these
manufacturers or others could result in lower sales, price reductions and loss
of market share, each of which would have an adverse effect on the Company's
results of operations.
Environmental Matters
The Company is subject to federal, state and local laws, regulations and
ordinances governing activities or operations that may have adverse
environmental effects, such as discharges to air and water, handling and
disposal practices for solid, special and hazardous wastes, and imposing
liability for the cost of cleaning up, and certain damages resulting from sites
of past spills, disposal or other releases of hazardous substances (together,
"Environmental Laws"). Sanctions which may be imposed for violation of
Environmental Laws include the payment or reimbursement of investigative and
clean up costs, administrative penalties and, in certain cases, prosecution
under environmental criminal statutes. The Company's manufacturing facilities
are subject to environmental regulation by, among other agencies, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and various state authorities in the states where such
facilities are located. The activities of the Company, including its
manufacturing operations at its leased facilities, are subject to the
requirements of Environmental Laws. The Company believes that the cost of
compliance with Environmental Laws to date has not been material to the Company.
The Company is not currently aware of any situations requiring remedial or other
action which would involve a material expense to the Company, or expose the
Company to material liability under Environmental Laws. As the operations of the
Company involve the storage, handling, discharge and disposal of substances
which are subject to regulation under Environmental Laws, there can be no
assurance that the Company will not incur any material liability under
Environmental Laws in the future or will not be required to expend funds in
order to effect compliance with applicable Environmental Laws.
The Company has completed testing at its facility in Bramalea, Ontario, Canada
for leakage of hazardous materials. As a result, in fiscal 1999, the Company
prepared a plan to remediate the contamination over a period of years and this
plan was subsequently approved by the Canadian Ministry of Environment (MOE).
The Company recorded a reserve for potential environmental liability on the
closing date of the Roberts acquisition of approximately $325,000 and this
amount was increased during fiscal 1999 by $275,000 to $600,000 based on an
estimate for the cost of remediation. To date, the Company has spent
approximately $444,000 and anticipates spending additional amounts on ongoing
monitoring of wells and other environmental activity at the approximate rate of
$20,000 per year for five to ten years.
Roberts Consolidated Industries, Inc. 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 an entity known
as "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 an 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 investigations to date, the Company continues
to believe that the entity identified as Roberts Consolidated Industries, Inc.,
named defendant in the amended complaint, was neither the same entity nor a
predecessor to the entity acquired by the Company.
6
Intellectual Property
The Company markets its specialty tools and related products under various
trademarks owned by the Company or its subsidiaries, including Q.E.P.(TM),
O'TOOL(TM) and ROBERTS(TM). The Company has devoted substantial time, effort and
expense to the development of brand name recognition and goodwill for products
sold under its trademarks, has not received any notice that its use of such
marks infringes upon the rights of others, and is not aware of any activities
which would appear to constitute infringement of any of its marks. Roberts
Consolidated has secured domestic and foreign patents relating to certain of its
carpet seaming products. Although the patents are important to the operation of
Roberts Consolidated, the Company does not believe that the loss of any one or
more of these patents would have a material adverse effect on the Company. These
patents are scheduled to expire in the years 2008 and 2013. Roberts Consolidated
also licenses its name to various foreign distributors.
Employees
As of May 4, 2001, the Company had 409 employees, including 71 administrative
employees, 78 sales and marketing employees, 151 manufacturing employees and 109
employees responsible for shipping activities. Ten of these employees work
part-time and 126 are employed by the Company's international subsidiaries,
including 7 part-time employees. The Company has not experienced any work
stoppages and none of the Company's employees are represented by a union. The
Company considers its relations with the employees to be good.
Item 2. Properties
The Company currently owns the facility in Bramalea, Ontario and leases all
other facilities located in the United States, Canada, Europe, South America,
New Zealand and Australia. All facilities aggregate approximately 647,000 square
feet. The following table sets forth certain information concerning the
facilities of the Company.
SQUARE ANNUALIZED LEASE RENEWAL
LOCATION USE FEET COST EXPIRATION OPTION
-------- --- ---- ---- ---------- ------
Boca Raton, Florida Executive offices, warehouse, manufacturing 77,000 $355,909 01/31/04 --
Sliedrecht. Holland Administrative; sales; manufacturing 52,544 102,787 11/01/02 --
Sliedrecht, Holland Warehouse 63,259 37,532 01/01/02 --
Morfelden, Germany Administrative; sales 300 7,575 10/01/00 --
Plaisir, France Administrative; warehouse 1,700 23,847 Yearly --
Henderson, NV Administrative; warehouse 111,000 347,012 01/31/08 Y
Mexico, Missouri Administrative; warehouse; manufacturing 155,000 311,945 03/31/03 Y
Bramalea, Ontario Administrative; warehouse; manufacturing 51,000 000 owned --
Mississaqua, Ontario Warehouse 15,000 68,960 12/31/02 --
Mississaqua, Ontario Warehouse 20,000 85,059 12/31/02 --
Buenos Aires, Argentina Administrative; warehouse; manufacturing 4,293 37,200 03/29/02 --
Auckland, New Zealand Administrative; warehouse 2,931 13,848 08/31/02 Y
Dandenong, Australia Manufacturing 26,200 75,815 06/01/05 Y
Welherill Park, Australia Administrative; warehouse 2,500 12,720 09/01/03 Y
Santiago, Chile Administrative; warehouse; manufacturing 3,840 40,800 07/01/01 Y
Little Falls, NJ Administrative; warehouse; manufacturing 17,000 54,000 12/31/02 N
Calhoun, GA Administrative; warehouse; manufacturing 25,000 50,000 03/07/02 --
Ft. Pierce, FL Administrative; warehouse; manufacturing 18,000 72,000 06/30/02 --
7
The Company believes that its existing facilities are adequate to meet its
current needs and that additional facilities can be leased to meet future needs.
8
Item 3. 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.
Roberts Consolidated Industries, Inc. 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 an entity known
as "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 an 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 Industries, Inc.,
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 investigations to date, the Company continues
to believe that the entity identified as Roberts Consolidated Industries, Inc.,
named defendant in the amended complaint, was neither the same entity nor a
predecessor to the entity acquired by the Company.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the period covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market Price and Dividend Information
The Company's Common Stock is traded on the Nasdaq National Market System. The
following table sets forth the high and low sales price per share for the Common
Stock for each quarter during fiscal year 2001 and 2000, as reported on the
Nasdaq National Market System. The fiscal 2000 amounts have been restated to
give retroactive effect to the five for four stock split declared by the Company
in June 2000.
Fiscal Year Ended February 28 or 29,
------------------------------------
2001 2000
---- ----
High Low High Low
First Quarter $ 7.300 $ 5.850 $ 6.800 $ 5.800
Second Quarter $ 7.938 $ 5.813 $ 6.750 $ 5.800
Third Quarter $ 6.750 $ 4.250 $ 6.600 $ 5.500
Fourth Quarter $ 5.500 $ 3.000 $ 6.950 $ 5.500
On May 4, 2001, the closing price of the Common Stock on the Nasdaq National
Market System was $3.35 per share. As of that date, there were 26 holders of
record of the Common Stock and approximately 580 beneficial owners of the Common
Stock.
The Company has not paid cash dividends and does not intend for the foreseeable
future to declare or pay any cash dividends on its Common Stock and intends to
retain earnings, if any, for the future operation and expansion of the Company's
business. Any determination to declare or pay dividends will be at the
discretion of the Company's board of directors and will depend upon the
Company's future earnings, results of operations, financial condition, capital
requirements, considerations imposed by applicable law and other factors deemed
relevant by the board of directors. The Company's credit facility also prohibits
the payment of dividends without the consent of the lender.
9
Item 6. Selected Financial Data
The selected consolidated financial data set forth below as of and for the years
ended February 28 or 29, 1997, 1998, 1999, 2000 and 2001 have been derived from
the audited consolidated financial statements of the Company. The audited
financial statements for the years ended February 28, 1997 and 1998 are not
included in this filing. The selected consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (Item 7 of this report) and the audited consolidated
financial statements and related notes thereto included elsewhere herein.
Earnings per share amounts in fiscal 1997 through fiscal 2000 have been adjusted
to reflect the five for four stock split discussed elsewhere herein.
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales $112,884 $113,571 $98,000 $53,691 $33,140
Cost of goods sold 76,940 79,037 68,549 35,954 20,119
---------- ---------- ---------- ---------- ----------
Gross profit 35,944 34,534 29,451 17,737 13,021
Shipping 9,682 8,987 7,592 4,020 2,440
General and administrative 9,554 9,373 8,074 5,206 4,048
Selling and marketing 11,616 9,494 8,253 4,843 3,569
Restructuring charge 637 -- -- -- --
Foreign exchange losses 4 7 17 3 11
---------- ---------- ---------- ---------- ----------
Operating income 4,451 6,673 5,515 3,665 2,953
Interest expense, net 2,131 1,700 1,625 373 7
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes and
extraordinary item 2,320 4,973 3,890 3,292 2,946
Provision for income taxes 887 1,951 1,466 1,282 1,143
---------- ---------- ---------- ---------- ----------
Net income before extraordinary item 1,433 3,022 2,424 2,010 1,803
Extraordinary item, gain on early extinguishment of debt --- 181 --- ---
---------- ---------- ---------- ---------- ----------
Net income $ 1,433 $ 3,203 $ 2,424 $ 2,010 $ 1,803
========== ========== ========== ========== ==========
Basic and diluted net income per common share before
extraordinary item $.42 $.90 $.72 $.60 $.71
Extraordinary item -- .05 --- --- ---
---------- ---------- ---------- ---------- ----------
Basic and diluted earnings per share $ .42 $ .95 $ .72 $ .60 $ .71
========== ========== ========== ========== ==========
Weighted average number of shares of common stock
outstanding 3,369 3,365 3,363 3,346 2,515
========== ========== ========== ========== ==========
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital $9,788 $ 13,511 $ 15,021 $ 14,212 $ 12,695
Total assets 64,036 57,715 48,251 43,026 16,434
Long term obligations 11,241 11,588 12,543 13,399 ---
Total liabilities 41,923 36,532 30,353 27,393 2,981
Shareholders' equity 22,113 21,183 17,898 15,633 13,453
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
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 related products used primarily for
surface preparation and installation of ceramic tile, carpet and marble. The
Company's products are sold through home improvement retailers, specialty
distributors to the hardware, construction, flooring and home improvement
trades, chain or independent hardware, tile and carpet retailers for use by the
do-it-yourself consumer as well as the construction or remodeling professional,
and original equipment manufacturers. Dollar figures set forth below are rounded
to the nearest thousand.
Results of Operations
Fiscal 2001 as compared to Fiscal 2000
Net sales for the twelve months ended February 28, 2001 ("fiscal 2001", or the
"fiscal 2001 period") were $112,884,000 compared to $113,571,000 for the twelve
months ended February 29, 2000 ("fiscal 2000", or the "fiscal 2000 period"), a
decrease of $687,000 or .6%. Selling prices remained relatively stable. Sales to
Home Center customers increased primarily as a result of new store openings and
expansion of the Company's business to one of its major Home Center customers.
In May 2000, the Company discontinued the sale of its tackless carpet strip
product to domestic distributors and licensed the rights of sale to a third
party. As a result, sales to the specialty distributors customers base of the
Company declined. Also impacting sales were additional incentives provided to
one of the Company's major customers. The impact from the licensing of the
tackstrip business and additional sales incentive was approximately $12,158,000.
Gross profit for fiscal 2001 was $35,944,000 compared to $34,534,000 for fiscal
2000, an increase of $1,410,000 or 4.1%. As a percentage of net sales, gross
profit increased to 31.8% in fiscal 2001 from 30.4% in fiscal 2000, primarily
due to a change in product mix towards higher margin products and the
discontinuance of the sale to domestic distributors of the low margin tackstrip
product. These increases were slightly offset by the aforementioned additional
customer incentives.
Shipping expenses for the fiscal 2001 period were $9,682,000 compared to
$8,987,000 for the fiscal 2000 period, an increase of $695,000 or 7.7%. As a
percentage of net sales, these expenses increased to 8.6% in the fiscal 2001
period from 7.9% in the fiscal 2000 period, primarily as a result of an increase
in freight rates charged by common carriers. In addition, other freight costs
remained relatively constant causing costs as a percentage of sales to increase.
The actual increase was substantially attributable to the increased sales
volume, increased freight costs and an absorption of a higher percentage of
freight costs by the Company to its domestic distributors.
General and administrative expenses for the fiscal 2001 period were $9,650,000
compared to $9,393,000 for the fiscal 2000 period, an increase of $257,000 or
2.7%. As a percentage of net sales, these expenses increased slightly to 8.5% in
the fiscal 2001 period from 8.3% in the fiscal 2000 period. This increase was
primarily due to the absorption of fixed costs over a reduced sales volume. The
actual increase was primarily the result of costs associated with the relocation
of the Company's California facility to Nevada, approximately $600,000, offset
by a reduction of expenses at the Company's domestic divisions.
Selling and marketing costs for the fiscal 2001 period increased to $11,616,000
from $9,494,000 in the fiscal 2000 period, an increase of $2,122,000 or 22.4%.
As a percentage of net sales, these expenses increased to 10.3% in the fiscal
2001 period from 8.4% in the fiscal 2000 period principally as a result of the
reduced sales volume, 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 increase in the actual amount of these expenses is
attributable to the increase in commissions paid to sales personnel and
marketing allowances to home center customers resulting principally from the
increased sales volume.
During the third quarter of the fiscal 2001 period, the Company finalized its
plan to close its California facility and relocate to Nevada where it is
anticipated that the Company will realize certain manufacturing efficiencies,
reduced cost of operations and tax savings. Additionally, the Company initiated
a downsizing of its Holland subsidiary to maintain
11
profitability. In connection with these decisions, the Company recorded a
restructuring charge of approximately $637,000 in the fiscal 2001 period. As of
February 28, 2001, substantially all costs of the plant closing and downsizing
were paid and there remained an approximate $70,000 reserve for the downsizing
of Holland.
Interest income for the fiscal 2001 period was approximately $175,000 compared
to $133,000 in fiscal 2000. Interest expense for the fiscal 2001 period was
approximately $2,307,000 compared to approximately $1,834,000 in fiscal 2000.
Interest expense increased primarily as a result of the increase in borrowings
associated with the funding of the increase in inventory and accounts receivable
caused by higher sales volume and an increase in borrowing rates.
Provision for income taxes was $887,000 in fiscal 2001 compared to $1,951,000 in
fiscal 2000, a decrease of $1,064,000 or 54.5%. The decrease is the result of
the decrease in the Company's taxable income. The effective tax rate was
approximately 38.2% in the fiscal 2001 period compared to 39.2% in the fiscal
2000 period. The estimated tax rate is based upon the most recent effective tax
rates available.
Net income for the fiscal 2001 period decreased to $1,433,000 compared to
$3,203,000 in fiscal 2000, a decrease of $1,770,000 or 55.3%. Net income as a
percentage of sales decreased to 1.3% in fiscal 2001 compared to 2.8% in fiscal
2000, reflecting a slightly higher gross profit margin resulting from the
licensing of the domestic distributor tack strip business offset by sales
incentives provided to a major retailer, higher selling and marketing, shipping,
general and administrative and restructuring expenses as a percentage of sales
as described above.
Results of Operations
Fiscal 2000 as compared to Fiscal 1999
Net sales for the twelve months ended February 29, 2000 ("fiscal 2000", or the
"fiscal 2000 period") were $113,571,000 compared to $98,000,000 for the twelve
months ended February 28, 1999 ("fiscal 1999", or the "fiscal 1999 period"), an
increase of $15,571,000 or 15.9%. Although selling prices remained relatively
stable, there was an increase in the volume of sales to substantially all of the
Company's customer groups, especially home centers, which was primarily the
result of an increase in the number of new store openings and an expansion by
the home centers of certain product lines offered by the Company. Approximately
$3,950,000 of the increase in net sales was the result of the Fiscal 2000
acquisitions.
Gross profit for fiscal 2000 was $34,534,000 compared to $29,451,000 for fiscal
1999, an increase of $5,083,000 or 17.3%. As a percentage of net sales, gross
profit increased slightly to 30.4% in fiscal 2000 from 30.0% in fiscal 1999,
primarily due to a change in product mix towards higher margin products and
slightly higher gross margins earned by the Company's Fiscal 2000 acquisitions.
Shipping expenses for the fiscal 2000 period were $8,987,000 compared to
$7,592,000 for the fiscal 1999 period, an increase of $1,395,000 or 18.4%. As a
percentage of net sales, these expenses increased to 7.9% in the fiscal 2000
period from 7.7% in the fiscal 1999 period, primarily as a result of an increase
in freight rates charged by common carriers and expenses incurred for the
repositioning of inventory related to the increased sales volume. The actual
increase was substantially attributable to the increased sales volume and the
approximate $225,000 expended by the Fiscal 2000 acquisitions.
General and administrative expenses for the fiscal 2000 period were $9,393,000
compared to $8,074,000 for the fiscal 1999 period, an increase of $1,299,000 or
16.1%. As a percentage of net sales, these expenses increased slightly to 8.3%
in the fiscal 2000 period from 8.2% in the fiscal 1999 period. This increase was
primarily due to the Fiscal 2000 acquisitions, which have a higher percentage of
expense relative to sales than the Company. The actual increase was primarily
the result of employee related costs and expenses and the Fiscal 2000
acquisitions accounted for approximately $610,000 of such increase.
Selling and marketing costs for the fiscal 2000 period increased to $9,494,000
from $8,253,000 in the fiscal 1999 period, an increase of $1,241,000 or 15.0%.
As a percentage of net sales, these expenses remained stable at 8.4% in the
fiscal 2000 and fiscal 1999 periods. The increase in the actual amount of these
expenses is attributable to the increase in commissions paid to sales personnel
and marketing allowances to home center customers resulting principally from the
12
increased sales volume. Approximately $270,000 of the increase is attributable
to the Fiscal 2000 acquisitions.
Interest income for the fiscal 2000 period was approximately $133,000 compared
to $113,000 in fiscal 1999. Interest expense for the fiscal 2000 period was
approximately $1,834,000 compared to approximately $1,738,000 in fiscal 1999.
Interest expense increased as a result of the increase in borrowings associated
with the Fiscal 2000 acquisitions and working capital needs.
During the third quarter of the fiscal 2000 period, the Company repurchased
approximately $1,229,000 of its 8% Subordinated Debentures issued in 1997 and
scheduled to mature in April 2001. The transaction resulted in an extraordinary
gain from the early extinguishment of debt of approximately $181,000.
Provision for income taxes was $1,951,000 in fiscal 2000 compared to $1,466,000
in fiscal 1999, an increase of $485,000 or 33.1%. The increase is the result of
an increase in the Company's taxable income and a slight increase in its
estimated effective tax rate to 37.8% in fiscal 2000 compared to 37.7% in fiscal
1999. The estimated tax rate is based upon the most recent effective tax rates
available and is slightly higher in the fiscal 2000 period due to an increase in
non-deductible expenses associated with the Company's Fiscal 2000 acquisitions.
Net income for the fiscal 2000 period increased to $3,203,000 compared to
$2,424,000 in fiscal 1999, an increase of $779,000 or 32.1%. Net income as a
percentage of sales increased to 2.8% in fiscal 2000 compared to 2.5% in fiscal
1999, reflecting a slightly higher gross profit margin and the extraordinary
income item of $181,000 offset by higher shipping and general and administrative
expenses as a percentage of sales as described above. Exclusive of the
extraordinary item, net income increased $598,000 to $3,022,000 (24.7%) and net
income as a percentage of sales increased to approximately 2.7%.
Liquidity and Capital Resources
Working capital decreased to approximately $9,788,000 at February 28, 2001 from
approximately $13,511,000 at February 29, 2000, a decrease of $3,723,000,
primarily as a result of the funds expended for certain acquisitions, capital
expenditures and the purchase of treasury stock. 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 in its
balance sheet.
Net cash provided by operating activities during the fiscal 2001 period was
$367,000 compared to $2,536,000 for the comparable fiscal 2000 period. The
decrease in cash from operating activities was primarily the result of income
from operations adjusted for non-cash charges for depreciation and amortization,
offset by an increase in accounts receivable and inventory resulting from the
increase in sales to Home Centers. Net cash used in investing activities was
$3,185,000 compared to $4,221,000 for the comparable fiscal 2000 period. The
fiscal 2001 amount was substantially attributable to capital expenditures and
funds expended for certain of the newly acquired entities.
For the fiscal 2001 period, cash provided by financing activities was
$2,721,000, which was primarily the result of an increase in short-term bank
debt associated with the newly acquired entities and collections on notes
receivable offset by the repayment of long-term and acquisition debt. Net cash
provided by financing activities was $2,329,000 in the fiscal 2000 period due
primarily to the increase in short term debt associated with the Fiscal 2000
acquisitions and collections on notes receivable offset by repayment of long
term 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
13
fixed percentage of eligible accounts receivable and inventory. Interest was
charged on a sliding scale. As of February 28, 2001, interest was at LIBOR (5.53
at February 28, 2001) plus 1.75%. At February 28, 2001, the Company had $989,000
available for future borrowings under its then existing facilities. If the new
facility had been in place the Company would have had $2,489,000 available. The
Company's Chilean subsidiary has a revolving credit facility with a financial
institution which permits borrowings of up to $100,000 with interest at 18% per
year. The facilities are secured by a standby letter of credit given by the
Company. This facility expires on June 30, 2001. At February 28, 2001 the
Chilean subsidiary had approximately $15,000 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 February 28, 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 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. 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. At February 28, 2001 and February 29, 2000, the remaining amortized
balance of this obligation was $6,104,000 and $5,891,000, respectively. 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 at $3.63. These warrants can be put to the Company after the
fifth year based on criteria set forth in the warrant agreement. In addition,
the Company may call these warrants after the sixth year based on the same
criteria.
In connection with the newly acquired entities, the Company issued five notes to
the respective sellers. Two of the notes, aggregating approximately $1,260,000,
were paid in fiscal 2001 and were non-interest bearing. The third note, having
an original principal balance of $900,000, is payable in equal 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 three installments of $312,500 in December 2000 and 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 year ended February 28, 2001,
the Company reduced interest expense by approximately $71,000 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 for the next twelve months.
14
Recently Issued Accounting Standards
In 1998, Statement of Financial Accounting Standards ("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 new accounting and reporting
standards for derivative financial 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 must implement SFAS No. 133 by the first quarter of
fiscal 2002. The Company has evaluated the requirements of SFAS No. 133 and
adoption will 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 08-22, "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 is required
to adopt EITF No. 00-22 and 00-25 in the first quarter of 2002. The Company has
reviewed the requirements and has determined that it is currently in compliance
with the consensuses and will not have a significant impact on the Company's
financial position or results of operations.
Forward-Looking Statements
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
On December 23, 2000, the Company entered into an interest rate swap agreement
with its primary lender. The interest rate swap agreement hedges the Company's
exposure on certain floating rate obligations in the aggregate principal amount
of $10,000,000. The purpose of the interest rate swap is to convert the
Company's floating rate interest obligations to obligations having a fixed rate
of 6.0% per annum for a one-year period. Prior to this interest rate swap, the
Company had 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 year ended February 28, 2001,
the Company reduced interest expense by approximately $71,000 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 $10,839,000 of variable rate debt not covered
by the interest rate swap agreement during fiscal 2001. If interest rates would
have increased by 10%, the effect on the Company would have been an increase
15
in interest expense of approximately $76,000.
Item 8. Financial Statements and Supplementary Financial Data
The response to this item is submitted on pages F1 - F23 of this Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item regarding directors and officers is
incorporated by reference from the definitive Proxy Statement to be filed by the
Company for the Annual Meeting of Stockholders to be held July 13, 2001.
Item 11. Executive Compensation
Information required by this item regarding compensation of officers and
directors is incorporated by reference from the definitive Proxy Statement to be
filed by the Company for the Annual Meeting of Stockholders to be held July 13,
2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated by reference from the
definitive Proxy Statement to be filed by the Company for the Annual Meeting of
Stockholders to be held July 13, 2001.
Item 13. Certain Relationships and Related Transactions
Information required by this item is incorporated by reference from the
definitive Proxy Statement to be filed by the Company for the Annual Meeting of
Stockholders to be held July 13, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of the report:
1. and 2. The financial statements filed as part of this report are
listed separately in the index to Financial Statements beginning on
page F-1 of this report.
3. For Exhibits see Item 14 (c), below. Exhibit Nos. 10.1 and 10.1.1
consist of management contracts or compensatory plans or arrangements
required to be filed as exhibits to this report.
(b) Reports on Form 8-K
None
(c) List of Exhibits:
Exhibit
No. Description
- ------- -----------
2.1 Form of Agreement and Plan of Merger regarding the change in
incorporation of the Company from a New York Corporation to a Delaware
Corporation*
16
2.1.1 Stock Purchase Agreement dated October 21, 1997 between the Company
and RCI Holdings, Inc.****
3.1.1 Certificate of Incorporation of the Company*
3.1.2 Bylaws of the Company**
3.3 Form of Indemnification Agreement executed by Officers and Directors
of the Company*
4.1 Form of specimen certificate for Common Stock of the Company*
4.1.1 Form of Warrant issued by the Company to the representative of the
underwriters of the Company's initial public offering*
9 Voting Trust Agreement, dated August 3, 1996, by and between Lewis
Gould and Susan J. Gould*
10.1 Employment Agreement, dated August 3, 1996, by and between Lewis Gould
and the Company*
10.1.1 Q.E.P. Co., Inc. Omnibus Stock Plan of 1996**
10.2.6 Lease Agreement, dated September 17, 1996, by and among the Company
and Lawrence Z. Crockett, as Trustee of the Lawrence Z. Crockett Trust
dated March 31, 1994 and Marilyn M. Crockett, as Trustee of the
Marilyn M. Crockett Trust dated March 31, 1994, including amendment
thereto dated January 22, 1997**
10.2.7 Industrial Lease, dated August 1, 1996, by and between
JMB/Pennsylvania Advisors - IV, L.P., and the Company**
10.3.1.1 Revolving Loan and Security Agreement and Assignment of Leases, dated
October 13, 1995, by and between Shawmut Bank Connecticut, N.A., a
national banking association, and the Company, including Promissory
Note dated October 13, 1995, Limited Guaranty of Lewis Gould dated
October 13, 1995, and form of Guaranty executed by the Company's
subsidiaries*
10.3.2 First Amendatory Agreement to Revolving Loan and Security Agreement,
dated as of July 25, 1997, by and among Q.E.P. Co., Inc. and its
subsidiaries and Fleet National Bank (f/k/a Shawmut Bank Connecticut,
N.A.), including Amended and Restated Revolving promissory Note dated
July 25, 1997 and Release of Limited Guaranty of Lewis Gould, dated
July 25, 1997.***
10.3.3 Amended and Restated Loan Agreement by and among Q.E.P. Co., Inc.,
Q.E.P.-O'Tool, Inc., Marion Tool Corporation, Westpoint Foundry, Inc.,
Roberts Consolidated Industries, Inc., Roberts Holding International,
Inc., and Roberts Company Canada Limited and Fleet National Bank dated
as of October 21, 1997.*****
10.3.3A First Amendatory Agreement to the Amended and Restated Loan Agreement
by and among Q.E.P. Co., Inc., Q.E.P.-O'Tool, Inc., Marion Tool
Corporation, Westpoint Foundry, Inc., Roberts Consolidated Industries,
Inc., Roberts Holding International, Inc., and Roberts Company Canada
Limited and Fleet National Bank dated as of October 21, 1997.*******
10.3.4 Stock Purchase Agreement effective January 1, 1998 between Q.E.P.
Holding B.V. and Roberts Beheer B.V.******
10.3.5 Purchase and Sale Agreement effective as of December 31, 1997 between
Roberts Beheer B.V., Q.E.P. Co., Inc. and Roberts Consolidated
Industries, Inc.******
10.3.6 Subordinated Loan and Security Agreement, dated April 5, 2001, by and
between The HillStreet Fund, L.P. and the Company, including
Subordinated Term Promissory Note dated April 5, 2001, Warrant
Agreement dated April 5, 2001, and Warrant dated April 5, 2001
10.3.7 Fourth Agreement of Amendment, dated April 5, 2001, by and between
Fleet Capital Corporation and the Company, including 2001 Term Note
dated April 5, 2001, Guaranty of Lewis Gould dated April 5, 2001,
Amended Trademark Collateral Security Agreement April 5, 2001, Amended
Patent Collateral Security Agreement April 5, 2001, form of Stock
Pledge Agreement executed by each of the Company and certain of its
subsidiaries, and form of Individual Security Agreement executed by
the following Company subsidiaries: Q.E.P. Stone Holdings, Inc.,
Boiardi Products Corporation, and Q.E.P. Zocalis Holding LLC
10.3.8 Intercreditor and Subordination Agreement, dated April 5, 2001, by and
between Fleet Capital Corporation, The HillStreet Fund, L.P., and the
Company and its subsidiaries
21 Subsidiaries of the Company
17
99.1 Form of Warrant issued to the following persons in the following
amounts: RCI Holdings, Inc. (100,000) and Marlborough Capital Fund,
Ltd. (100,000) ****
99.2 Form of 8% Convertible Subordinated Debenture issued to the following
persons in the following amounts: RCI Holdings, Inc. ($1,911,673.30),
Marlborough Capital Fund, Ltd. ($5,088.326.70), and IBJ Schroeder as
Escrow Agent ($500,000).****
- ------------------
* 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.
*** Incorporated by reference to Exhibit of the same number filed with the
Company's Quarterly Report on Form 10-Q filed on October 14, 1997.
**** Incorporated by reference to Exhibit of the same number filed with the
Company's Report on Form 8-K filed on November 3, 1997 (except that
Exhibit 2.1.1 above was numbered 2.1 in the Form 8-K).
***** Incorporated by reference to Exhibit of the same number filed with the
Company's Quarterly Report on Form 10-Q filed on January 14, 1998.
****** Incorporated herein by reference to Exhibit of the same number filed
with the Company's Annual Report on Form 10-K filed on May 28, 1998.
******* Incorporated herein by reference to Exhibit of the same number filed
with the Company's Annual Report on Form 10-K filed on May 27, 2000.
(d) The financial statement schedule filed as part of this report is
listed separately in the Index to Financial Statements beginning on
page F-1 of this report.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Boca Raton,
Florida, State of Florida, on May 25, 2001.
Q.E.P. CO., INC.
By: /S/ LEWIS GOULD
------------------------------------
Lewis Gould
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Lewis Gould and Marc Applebaum and each of them, his
true and lawful attorney-in-fact and agents, with full power of substitution and
resubstitution for him in his name, place and stead, in any and all capacities,
to sign all amendments to this report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact or his substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/S/ LEWIS GOULD Chairman, Chief Executive Officer May 28, 2001
- ------------------------- and Director (Principal Executive
Lewis Gould Officer)
/S/ MARC APPLEBAUM Senior Vice President and Chief May 28, 2001
- ------------------------- Financial Officer (Principal
Marc Applebaum Financial and Accounting Officer)
/S/ ROBERT FEUERZEIG Director May 28, 2001
- -------------------------
Robert Feuerzeig
/S/ EMIL VOGEL Director May 28, 2001
- -------------------------
Emil Vogel
/S/ CHRISTIAN NAST Director May 28, 2001
- -------------------------
Christian Nast
/S/ LEONARD GOULD Director May 28, 2001
- -------------------------
Leonard Gould
/S/ DAVID MALIZIA Director May 28, 2001
- -------------------------
David Malizia
/S/ PIERRE SIMARD Director May 28, 2001
- -------------------------
Pierre Simard
19
C O N T E N T S
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statement of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-24
Schedule II - Valuation and Qualifying Accounts S-1
F-1
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Q.E.P. Co., Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Q.E.P. Co., Inc.
(a Delaware corporation) and Subsidiaries as of February 28, 2001 and February
29, 2000, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended February
28, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Q.E.P. Co., Inc.
and Subsidiaries as of February 28, 2001 and February 29, 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended February 28, 2001 in conformity with
accounting principles generally accepted in the United States of America.
We have also audited Schedule II of Q.E.P. Co., Inc. and Subsidiaries for each
of the three years in the period ended February 28, 2001. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
Grant Thornton LLP
Miami, Florida
March 30, 2001
(Except for Note K, as to which the date is April 5, 2001.)
F-2
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS February 28, 2001 February 29, 2000
----------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 397,817 $ 829,063
Accounts receivable, less allowance for
doubtful accounts of approximately
$662,000 and $741,000 as of
February 28, 2001 and February 29,
2000, respectively. 17,576,040 16,176,540
Notes receivable 21,845 1,681,210
Inventories 20,132,585 17,588,885
Prepaid expenses 1,582,627 972,992
Deferred income taxes 582,107 752,630
------------- -------------
Total current assets 40,293,021 38,001,320
Property and equipment, net 7,155,327 4,329,695
Deferred income taxes 1,019,095 1,271,445
Intangible assets, net 15,366,260 13,251,699
Notes receivable 33,886 42,339
Other assets 168,165 818,215
------------- -------------
Total assets $ 64,035,754 $ 57,714,713
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 15,484,622 $ 10,414,746
Current maturities of long term debt 2,016,385 1,470,092
Acquisition notes payable 932,500 1,872,500
Accounts payable 8,947,842 6,452,570
Accrued liabilities 3,123,469 4,280,901
------------- -------------
Total current liabilities 30,504,818 24,490,809
Notes payable 5,120,566 4,584,076
Acquisition notes payable 1,620,000 1,112,500
Subordinated long term debt 4,500,000 5,891,126
Deferred income taxes 177,621 453,286
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 2,500,000 shares
authorized, $1.00 par value; 336,660
shares issued and outstanding at
February 28, 2001 and February 29, 2000 336,660 336,660
Common stock; 20,000,000 shares authorized,
$.001 par value; 3,381,190 and 3,356,118
shares issued and outstanding at
February 28, 2001 and February 29, 2000,
respectively 3,381 3,356
Additional paid-in capital 9,082,087 8,946,061
Retained earnings 13,758,547 12,337,614
Cost of stock held in treasury (350,993) (57,900)
Accumulated other comprehensive income (716,933) (382,875)
------------- -------------
22,112,749 21,182,916
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 64,035,754 $ 57,714,713
============= =============
The accompanying notes are an integral part of these statements
F-3
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended
-----------------------------------------------
February 28, February 29, February 28,
2001 2000 1999
------------- ------------- -------------
Net sales $ 112,884,087 $ 113,571,475 $ 97,999,969
Cost of goods sold 76,939,755 79,036,635 68,548,599
------------- ------------- -------------
Gross profit 35,944,332 34,534,840 29,451,370
------------- ------------- -------------
Costs and expenses:
Shipping 9,682,247 8,987,252 7,592,357
General and administrative 9,650,354 9,393,494 8,073,811
Selling and marketing 11,616,403 9,494,325 8,253,277
Restructuring charge 637,462 -- --
Other (income) expense, net (93,527) (13,458) 16,424
------------- ------------- -------------
31,492,939 27,861,613 23,935,869
------------- ------------- -------------
Operating income 4,451,393 6,673,227 5,515,501
Interest income 175,389 133,287 112,793
Interest expense (2,306,584) (1,833,675) (1,737,959)
------------- ------------- -------------
Income before provision
for income taxes and extraordinary item 2,320,198 4,972,839 3,890,335
Provision for income taxes 887,493 1,951,447 1,466,771
------------- ------------- -------------
Net income before extraordinary item 1,432,705 3,021,392 2,423,564
Extraordinary item, gain on early
extinguishment of debt -- 181,559 --
------------- ------------- -------------
Net income $ 1,432,705 $ 3,202,951 $ 2,423,564
============= ============= =============
Basic and diluted earnings per common share:
Income before extraordinary item $ 0.42 $ 0.90 $ 0.72
Extraordinary item -- .05 --
------------- ------------- -------------
Net income $ 0.42 $ 0.95 $ 0.72
============= ============= =============
The accompanying notes are an integral part of these statements.
F-4
Q.E.P. CO. INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Preferred stock Common stock
--------------------- -------------------- Paid-in Retained
Shares Amount Shares Amount capital earnings
------ ------ ------ ------ ------- --------
Balance at March 1, 1998 336,660 $ 336,660 2,654,894 $ 2,655 $ 8,746,876 6,736,712
Net income 2,423,564
Other comprehensive income:
Foreign currency translation adjustment
Dividends (13,171)
--------- ----------- ----------- ----------- ----------- -----------
Balance at February 28, 1999 336,660 336,660 2,654,894 2,655 8,746,876 9,147,105
Net income 3,202,951
Other comprehensive income:
Foreign currency translation adjustment
Exercise of stock options 30,000 30 199,185
Dividends (11,771)
--------- ----------- ----------- ----------- ----------- -----------
Balance at February 29, 2000 336,660 336,660 2,684,894 2,685 8,946,061 12,338,285
Net income 1,432,705
Other comprehensive income:
Foreign currency translation adjustment
Purchase of Treasury Stock
Stock Dividend 673,796 673 (673)
Exercise of stock options 22,500 23 136,026
Dividends (11,770)
--------- ----------- ----------- ----------- ----------- -----------
Balance at February 28, 2001 336,660 $ 336,660 3,381,190 $ 3,381 $ 9,082,087 $13,758,547
========= =========== =========== =========== =========== ===========
Accumulated
Other Other
Comprehensive Treasury Comprehensive
Income stock Income
------ ----- ------
Balance at March 1, 1998 (131,938) (57,900)
Net income 2,423,564
Other comprehensive income:
Foreign currency translation adjustment (145,072) (145,072)
-----------
$ 2,278,492
Dividends ===========
----------- -----------
Balance at February 28, 1999 (277,000) (57,900)
Net income 3,202,951
Other comprehensive income:
Foreign currency translation adjustment (105,875) (105,875)
-----------
$ 3,097,076
===========
Exercise of stock options
Dividends
----------- -----------
Balance at February 29, 2000 (382,875) (57,900)
Net income $ 1,432,705
Other comprehensive income:
Foreign currency translation adjustment (334,058) (334,058)
-----------
$ 1,098,647
===========
Purchase of Treasury Stock
(293,093)
Stock Dividend
Exercise of stock options
Dividends
----------- -----------
Balance at February 28, 2001 $ (716,933) $ (350,993)
=========== ===========
The accompanying notes are an integral part of these statements.
F-5
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
-----------------------------------------------------
February 28, February 29, February 28,
2001 2000 1999
----------- ----------- ----------
Cash flows from operating activities:
Net income $1,432,705 $3,202,951 $2,423,564
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,356,927 949,155 835,044
Amortization of costs in excess of assets acquired 457,081 368,134 180,718
Amortization of discount on long term debt 213,092 267,112 312,520
Bad debt expense 127,119 277,734 163,505
Loss (gain) on sale of property and equipment 26,023 --- (91,571)
Deferred income taxes 147,207 5,502 134,162
Gain on early extinguishments of debt --- (181,559) ---
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (1,446,741) 9,369 (3,111,028)
Inventories (2,230,277) (1,186,665) (2,882,201)
Prepaid expenses (609,635) (543,250) 244,258
Other assets (368,620) 707,821 316,391
Accounts payable and accrued liabilities 1,262,131 (1,339,946) 1,462,136
----------- ----------- ----------
Net cash provided by (used in) operating activities 367,012 2,536,358 (12,502)
----------- ----------- ----------
Cash flows from investing activities
Capital expenditures (2,018,793) (719,880) (1,287,197)
Purchase of trademarks and licenses (200,000) (833,050) ---
Acquisitions, net of cash acquired (1,116,517) (2,668,000) ---
Proceeds from sale of property & equipment 150,000 --- 80,734
----------- ----------- ----------
Net cash used in investing activities (3,185,310) (4,220,930) (1,206,463)
----------- ----------- ----------
Cash flows from financing activities:
Net borrowings under lines of credit 5,069,876 4,330,537 1,837,757
Repayments of long term debt (1,384,925) (1,515,397) (1,211,516)
Repayments of acquisition debt (2,462,843) (377,851) ---
Purchase of subordinated debt --- (1,093,817) ---
Purchase of treasury stock (293,093) --- ---
Proceeds from exercise of stock options 136,047 199,185 ---
Payments on notes receivable 1,667,818 798,558 801,049
Dividends (11,770) (11,771) (13,171)
----------- ----------- ----------
Net cash provided by financing activities 2,721,110 2,329,444 1,414,119
----------- ----------- ----------
Cumulative currency translation adjustment (334,058) (105,875) (145,072)
----------- ----------- ----------
Net (decrease) increase in cash (431,246) 538,997 50,082
Cash and cash equivalents at beginning of year 829,063 290,066 239,984
----------- ----------- ----------
Cash and cash equivalents at end of year $ 397,817 $ 829,063 $ 290,066
=========== =========== ==========
The accompanying notes are an integral part of these statements.
F-6
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS
Q.E.P. Co., Inc. is a leading manufacturer, marketer and distributor of a broad
line of specialty tools and flooring related products for the home improvement
market. Under brand names including Q.E.P.(TM), O'TOOL(TM) and ROBERTS(TM) the
Company markets over 4,000 specialty tools and flooring related products used
primarily for the surface preparation and installation of ceramic tile, carpet
and marble. The Company sells its products to large home improvement retail
centers, as well as traditional distribution outlets in 50 states and more than
49 countries worldwide.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements include the accounts of Q.E.P. Co.,
Inc. and its wholly owned subsidiaries, after eliminating all significant
inter-company accounts and transactions.
2. Warrants
In connection with its initial public offering and an acquisition, the
Company has issued a total of 400,000 warrants to purchase common stock.
The exercise price associated with the warrants is $8.00 per share for
250,000 warrants and $8.16 per share for 150,000 warrants. Such warrants
expire on September 17, 2001 and October 21, 2002, respectively. In
connection with the refinancing of certain subordinated debt (see Note
K), the Company issued 325,000 warrants at $3.63 to expire on April 4,
2011. These warrants can be put to the Company after the fifth year based
on certain criteria. Further, the Company may call these warrants, based
on certain criteria, after the sixth year.
3. Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
4. Inventories
Inventories are stated at the lower of standard cost or market.
5. Property and Equipment
Property and equipment are stated at cost. Depreciation is provided by
straight-line methods in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives.
Leasehold improvements are amortized over their expected useful life or
the life of the respective lease, whichever is shorter.
The following are the estimated lives of the Company's property and
equipment:
Machinery and warehouse equipment 5 to 10 years
Furniture and equipment 5 to 10 years
Capital leases 3 to 5 years
Building 30 to 33 years
Leasehold improvements 5 to 15 years
F-7
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maintenance and repairs are charged to expense, while significant
renewals and betterments are capitalized. When property is sold or
otherwise disposed of, the cost and related depreciation are removed from
the accounts, and any resulting gain or loss is reflected in operations
for the period.
6. Intangible Assets
Intangible assets (predominately goodwill which represents the cost in
excess of net assets of businesses acquired) are recorded and amortized
over periods ranging from five to thirty five years using the
straight-line method. At each balance sheet date, the Company evaluates
the reliability of goodwill based on expectations of non-discounted cash
flows. If the sum of the non-discounted cash flows is less than the
carrying amount of all assets, including intangible assets, the Company
recognizes an impairment loss. The Company believes no material
impairment to goodwill exists at February 28, 2001.
7. Income Taxes
Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end.
8. Leases
Leases which meet certain criteria are classified as capital leases. For
such leases, assets and obligations are recorded initially at the fair
market values of the leased assets. The capitalized leases are amortized
using the straight-line method over the assets' estimated economic lives.
Interest expense relating to the lease liabilities is recorded to effect
a constant rate of interest over the terms of the obligations. Leases not
meeting capitalization criteria are classified as operating leases and
related rentals are charged to expense as incurred.
9. Stock-Based Compensation
The Company grants stock options for a fixed number of shares to
employees and directors with an exercise price equal to at least 85% of
the fair market value of the shares at the date of grant. The Company has
adopted the disclosure-only provision of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which
permits the Company to account for stock option grants in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB
25, compensation expense is recorded when the exercise price of the
Company's employee stock option is less than the market price of the
underlying stock at the date of grant.
10. Earnings Per Share
Basic earnings per share is computed based on weighted average shares
outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and dilutive common stock
equivalent shares outstanding during the period. Dilutive common stock
equivalent shares consist of stock options and warrant common stock
equivalent shares which are not utilized when the effect is antidilutive.
11. Comprehensive Income
The Company records comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." SFAS 130 requires foreign currency
translation adjustments to be included in other comprehensive income.
F-8
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of comprehensive income and the effect on earnings for the
year ended February 28, 2001 are detailed in the Company's accompanying
Consolidated Statement of Shareholders' Equity.
12. Post Employment Benefits
The Company has a policy which provides service benefits to its salaried
employees. The Company records a liability for post employment benefits
in accordance with SFAS No. 112, "Employers Accounting for Post
Employment Benefits". Since the Company cannot reasonably estimate post
employment benefits, including severance benefits, on an ongoing basis,
these costs are recorded only when the probability of payment and the
amount of such payment can be reasonably determined.
13. Interest Rate Swap
The interest rate swap agreement, (the "Swap") involves the exchange of
fixed and floating interest rate payment obligations over various terms
without the exchange of the underlying notional principal amount. The
differential to be paid or received is recognized as an adjustment to
interest expense in the period incurred.
14. Fair Value of Financial Instruments
The following methods and assumptions were used in estimating the
indicated fair values of financial instruments:
Cash and cash equivalents: The carrying amount approximates fair value
due to the short maturity of these instruments.
Short term debt: The carrying amount approximates fair value due to the
short maturity of these instruments.
Long term debt: The fair value of the Company's borrowings approximates
the carrying value based on current rates offered to the Company for
similar debt.
Interest rate swap: The fair value of the interest rate swap used for
hedging purposes, approximates market value.
15. Foreign Currencies
The financial statements of subsidiaries outside the United States are
generally measured using the local currency as the functional currency.
Assets and liabilities recorded in foreign currencies on the books of
foreign subsidiaries are translated at the exchange rate on the balance
sheet date. Translation adjustments resulting from this process are
charged or credited to equity. Revenues, costs, and expenses are
translated at average rates of exchange prevailing during the year. Gains
and losses on foreign currency transactions are included in operating
expenses.
16. Revenue Recognition
Sales are recognized when merchandise is shipped and such revenue is
recorded net of estimated sales returns, discounts and allowances. The
Company establishes reserves for returns and allowances based on current
and historical information and trends, sales and accounts receivable have
been reduced by such amounts.
17. Shipping and Handling Costs
Shipping and handling costs are classified as a separate operational
expense on the accompanying Consolidated Statements of Income.
F-9
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Advertising Cost
Advertising costs are expensed in the period incurred except those costs
which result in tangible assets, such as catalogs, which are treated as
prepaid supplies and charged to operations as consumed.
19. Research and Development
Research and development costs are charged to expense in the period
incurred.
20. Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States, management is
required to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those conditions could affect the
Company's estimate.
21. Certain amounts in the fiscal year 2000 presentation have been
reclassified to conform with the fiscal year 2001 presentation.
NOTE C - ACQUISITIONS
Acquisitions are accounted for as purchases and, accordingly, have been included
in the Company's consolidated results of operations since the acquisition date.
The purchase price is allocated based on the estimated fair values of assets
acquired and liabilities assumed. Purchase price allocations are subject to
refinement until all pertinent information regarding the acquisitions is
obtained.
During fiscal 2001, the Company made three strategic acquisitions. The purchase
price for these acquisitions, most of which were domestic companies, was
approximately $2,800,000. The excess of aggregate purchase price over the fair
market value of net assets acquired of approximately $500,000 is being
amortized on a straight line basis over 20 years.
During fiscal 2000, the Company made six strategic acquisitions ("the Fiscal
2000 Acquisitions"). The purchase price for all of these acquisitions, the
majority of which were international companies, was approximately $8,750,000.
The excess of aggregate purchase price over the fair market value of net assets
acquired of approximately $3,500,000 is being amortized on a straight line basis
over 20 years.
The unaudited pro forma consolidation of the acquisitions occurring in fiscal
2000 and fiscal 2001 showing the results of operations assuming the above
purchases occurred on either March 1, 1999 or March 1, 2000 are not material and
are not included herein.
NOTE D - 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
F-10
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 three years
ended February 28, 2001, the weighted average number of basic shares of common
stock outstanding amounted to 3,343,868 in 2001, 3,345,701 in 2000 and 3,318,618
in 1999. For the three years ended February 28, 2001 the weighted average number
of diluted shares of common stock outstanding amounted to 3,368,818 in 2001,
3,364,668 in 2000 and 3,362,553 in 1999.
NOTE E - 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 remained at $0.001 per share and, accordingly, $673 was transferred from
retained earnings to common stock.
For the three years ended February 28, 2001, the effect on earnings per share
was a reduction of $0.11 in 2001, $0.24 in 2000 and $0.18 in 1999. 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 F - 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
three years ending February 28, 2001, the Company sold approximately $2,956,513
in 2001, $14,114,144 in 2000 and $13,517,543 in 1999 of tackless carpet strip.
NOTE G - SEGMENT INFORMATION
The Company operates in one business segment -- flooring-related products
because of the similarity of economic conditions, products, production
processes, customers and expected long-term performance. The Company
manufactures and distributes flooring-related products to the residential new
construction, do-it-yourself and professional remodeling and renovation markets
and home centers.
Information attributable to the Company's geographic areas is as follows:
F-11
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United Canada/
States of Latin New Zealand/ Inter-company Consolidated
2001 America America Australia Europe Eliminations Total
---- ------- ------- --------- ------ ------------ -----
Sales $87,142,192 $12,846,153 $4,112,636 $8,783,106 $ --- $ 112,884,087
Transfers between areas 1,300,127 --- 4,102 (1,304,229) ---
----------- ----------- ---------- ---------- ------------ -------------
Total Sales $88,442,319 $12,846,153 $4,112,636 $8,787,208 $(1,304,229) $ 112,884,087
=========== =========== ========== ========== ============ =============
Long-lived Assets $41,136,460 $ 2,696,467 $ 785,885 $ 950,062 $(22,979,122) $ 22,689,752
=========== =========== ========= ========= ============= ============
2000
----
Sales $89,366,768 $13,104,460 $2,192,192 $8,908,055 $ --- $ 113,571,475
Transfers between areas 947,927 --- --- --- (947,927) ---
----------- ----------- ---------- ---------- ----------- -------------
Total Sales $90,314,695 $13,104,460 $2,192,192 $8,908,055 $ (947,927) $ 113,571,475
=========== =========== ========== ========== =========== =============
Long-lived Assets $36,628,219 $ 1,632,748 $ 291,024 $1,172,581 $(21,324,963) $ 18,399,609
=========== =========== ========= ========= ============= ============
1999
----
Sales $78,657,091 $9,358,878 $ --- $9,984,000 $ --- $ 97,999,969
Transfers between areas 3,591,489 --- --- --- (3,591,489) ---
----------- ---------- -------- ---------- ----------- ------------
Total Sales $82,248,580 $9,358,878 $ --- $9,984,000 (3,591,489) $ 97,999,969
=========== ========== ======== ========== =========== ============
Long-lived Assets $30,786,973 $1,142,945 $ --- $1,048,198 $(19,993,565) $ 12,984,551
=========== ========== ======== ========= ============= ============
F-12
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - NOTE RECEIVABLE
Concurrent with the acquisition of Roberts, the Company sold certain production
equipment (at their stated value) to an unrelated third party for a note in the
amount of $3,750,000. Such note was collateralized by the equipment. At the time
of issuance, the note was recorded at its net present value of $3,250,000
utilizing its effective interest rate of approximately 9% and was payable
through a reduction in purchase price of goods sold to the Company under a
supply agreement. At February 29, 2000, the amount of the receivable was
approximately $1,639,000 and this amount was classified as a current asset. As a
result of the license agreement, with the same third party (see NOTE F), this
note was paid in its entirety in fiscal 2001.
NOTE I - INVENTORIES
Inventories consisted of the following:
February 28, February 29,
2001 2000
---- ----
Raw materials and work-in-process $ 4,957,226 $ 4,576,530
Finished goods 15,175,359 13,012,355
----------- -----------
$20,132,585 $17,588,885
=========== ===========
NOTE J - PROPERTY AND EQUIPMENT
February 28, February 29,
2001 2000
---- ----
Property and equipment consisted of the following:
Machinery and warehouse equipment $ 4,635,952 $ 2,715,958
Office furniture, equipment and computer equipment 3,168,332 3,307,566
Building and leasehold improvements 2,019,756 1,017,607
----------- -----------
9,824,040 7,041,131
Less accumulated depreciation and amortization (2,668,713) (2,711,436)
----------- -----------
$ 7,155,327 $ 4,329,695
=========== ===========
NOTE K - DEBT
Total debt consists of the following:
February 28, February 29,
2001 2000
---- ----
(A) Payable to banks under revolving credit facilities $15,484,622 $10,414,746
(B) Subordinated debt 4,604,217 6,137,297
(C) Payable to a bank under term loan credit facilities 5,785,713 5,428,571
(D) Payable to a bank under a mortgage agreement 635,350 ---
(E) Acquisition notes payable 2,552,500 2,985,000
Other debt, including capital leases 611,671 625,597
----------- -----------
29,674,073 25,591,211
Less current installments 18,433,507 13,757,338
----------- -----------
11,240,566 11,833,873
Less unamortized discount --- 246,171
----------- -----------
Long Term $11,240,566 $11,587,702
=========== ===========
F-13
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - DEBT (continued)
(A) 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%. The 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 based on a
sliding scale. As of February 28, 2001interest was at LIBOR (5.53 at
February 28, 2001) plus 1.75%. At February 28, 2001, the Company had
$989,000 available for future borrowings under its then existing
facilities, net of approximately $460,000 in outstanding letters of
credit. If the new facility had been in place, the Company would have
had $2,489,000 available. The Company's Chilean subsidiary has a
revolving credit facility with a financial institution, which permits
borrowings of up to $110,000 with interest at 18% per year. The
facilities are secured by a standby letter of credit given by the
Company. This facility expires on June 30, 2001. At February 28, 2001,
the Chilean subsidiary had approximately $16,000 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 February
28, 2001 the maximum permitted borrowing was approximately $300,000 and
was fully utilized.
(B) In connection with the acquisition of Roberts, the Company issued
$7,500,000 of subordinated debentures bearing an interest rate of 8%.
During fiscal 2000, the Company repurchased approximately $1,229,000 of
such debentures at a discount resulting in an extraordinary gain from
early extinguishments of debt of approximately $181,000. The remaining
bonds matured in April 2001 and were paid. 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 at $3.63. 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.
(C) The original term loan is payable in equal quarterly installments over
a seven year period. The loan is collateralized by substantially all of
the assets of the Company. The interest rate varies based on
conditions, as defined in the agreement and was approximately 8.2% at
February 28, 2001. The balance of the term loan at February 28, 2001
and February 29, 2000 was $4,285,713 and $5,428,571, respectively.
The Company obtained an additional term loan ("2001 Term Loan") from
its primary lending institution, the proceeds of which were utilized to
repay its subordinated debt which matured in April 2001. This loan in
the amount of $1,500,000 is payable in equal quarterly installments,
which commence July 1, 2001 and end 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 Office of the Company.
(D) During fiscal 2001, the Company purchased the land and building from
its then existing landlord where it operates in Bramalea, Ontario,
Canada. The cost of the facility was approximately $1,000,000 of which
the company obtained a mortgage in the approximate amount of $675,000
from a Canadian financial institution. This facility is payable in ten
equal installments at 7.8% and is collateralized by the land and
building. The facility also requires the Company to continue
remediation efforts on the property as approved by the Canadian
Ministry of Environment. See Note M.
F-14
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(E) In connection with the acquisitions of certain newly acquired entities,
the Company issued five notes to the respective sellers. During fiscal
2001, the Company issued a note for $1,600,000, payable in equal
quarterly payments over a five-year period. The note bears an interest
rate of 8%. As of February 28, 2001, the Company is obligated for two
additional notes for prior year acquisitions. One, having an original
balance of $900,000, is payable in equal annual installments over a
three year period with interest at the Company's prevailing borrowing
rate. The balance at February 28, 2001, is $600,000. The other note has
a balance of $512,500 and is payable in two final installments of
$312,500 and $200,000 in December 2001 and 2003 respectively.
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 year ended February 28, 2001,
the Company reduced interest expense by approximately $71,000 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.
Interest paid for all debt was approximately, $2,025,100, $1,486,000 and
$1,391,000 in fiscal 2001, 2000 and 1999 respectively.
The Company has recorded its debt at February 28, 2001 as if the refinancing of
the subordinated debt discussed in this footnote had taken place on February
28, 2001.
The aggregate maturities of all debt maturing during each of the next five years
as of February 28, 2001 is as follows:
2002 $ 18,433,507
2003 2,957,746
2004 1,920,654
2005 1,238,906
2006 1,903,294
Thereafter 3,219,966
------------
Total $ 29,674,073
============
Current $ 18,433,507
Long Term 11,240,566
------------
TOTAL $ 29,674,073
============
F-15
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
February 28, February 29,
2001 2000
---- ----
Accrued payroll and employee benefits $ 838,738 $1,720,789
Accrued volume and advertising discount 1,611,216 675,930
Accrued interest 326,887 258,495
Accrued income taxes --- 199,548
Accrued liabilities - other 346,628 1,426,139
------------ ------------
$ 3,123,469 $ 4,280,901
============ ============
NOTE M - COMMITMENTS AND CONTINGENCIES
The Company provides accruals for all direct costs associated with the estimated
resolution of contingencies at the earliest date at which it is deemed probable
that a liability has been incurred and the amount of such liability can be
reasonably estimated.
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.
1. Future Minimum Obligations
The Company conducts its operations from various leased facilities.
Future minimum payments under non-cancelable operating leases consist
of the following in fiscal years ending after February 29, 2000:
2001 $ 1,433,000
2002 1,087,000
2003 469,000
2004 106,000
2005 25,000
-----------
Total $ 3,120,000
===========
Total rent expense under non-cancelable operating leases approximated
$2,045,000, $1,891,000 and $1,868,000 in fiscal 2001, 2000 and 1999,
respectively.
2. Roberts Consolidated Industries
The Company is subject to federal, state and local laws, regulations
and ordinances governing activities or operations that may have adverse
environmental effects, such as discharges to air and water, handling
and disposal practices for solid, special and hazardous wastes, and
imposing liability for the cost of cleaning up, and certain damages
resulting from sites of past spills, disposal or other releases of
hazardous substances (together, "Environmental Laws"). Sanctions which
may be imposed for violation of Environmental Laws include the payment
or reimbursement of investigative and clean up costs, administrative
penalties and, in certain cases, prosecution under environmental
criminal statutes. The Company's manufacturing facilities are subject
to environmental regulation by, among other agencies, the Environmental
Protection Agency, the Occupational Safety and Health Administration,
and various state authorities in the states where such facilities are
located. The activities of the Company, including its manufacturing
operations at its leased facilities, are subject to the requirements of
Environmental Laws. The Company believes that the cost of compliance
with Environmental Laws to date has not been material to the Company.
The Company is not currently aware of any situations
F-16
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
requiring remedial or other action which would involve a material
expense to the Company, or expose the Company to material liability
under Environmental Laws. As the operations of the Company involve the
storage, handling, discharge and disposal of substances which are
subject to regulation under Environmental Laws, there can be no
assurance that the Company will not incur any material liability under
Environmental Laws in the future or will not be required to expend
funds in order to effect compliance with applicable Environmental Laws.
The Company has completed testing at its facility in Bramalea, Ontario,
Canada for leakage of hazardous materials. As a result, in fiscal 1999
the Company prepared a plan to remediate the contamination over a
period of years and this plan was subsequently approved by the Canadian
Ministry of Environment (MOE). The Company recorded a reserve for
potential environmental liability at the acquisition date of Roberts
Consolidated Industries, Inc. of approximately $325,000 and this amount
was increased during fiscal 1999 by $275,000 to $600,000 based on an
estimate for the cost of remediation. To date, the Company has spent
approximately $444,000 and anticipates spending the remainder on
ongoing monitoring of wells and other environmental activity at the
approximate rate of $20,000 per year for the next five to ten years.
NOTE N - PENSION AND RETIREMENT PLANS
Profit Sharing and 401(k) Plan
The Company and its subsidiaries offers a 401(k) benefit plan which provides for
voluntary contributions by employees subject to a maximum annual contribution.
The Company may, at the discretion of the Board of Directors, make contributions
to the plan. For the three years ended February 28, 2001, the Company
contributed $69,753, $68,300 and $92,700, respectively.
Subsequent to the acquisition of Roberts, the Company terminated the Roberts
Salaried Employees Defined Benefit Pension Plan. As of May 31, 1998, the
projected benefit obligation was estimated to be $2,452,000 and the plan assets
were approximately $2,947,000. The Company initially recorded an asset in excess
of projected benefit of approximately $700,000. During fiscal 1999, the Company
had an actuarial valuation prepared which adjusted this amount and goodwill by
approximately $226,000. During fiscal 2001, the Plan distributed its remaining
assets to its participants under a new defined contribution plan and, with the
approval of regulatory authorities, the remainder reverted to the Company. This
new defined contribution plan expects to distribute its assets to all
participants in fiscal 2002. No pension expense was recorded in each of the
three years ended February 28, 2001.
NOTE O - INCOME TAXES
Income (loss) before provision for income taxes and extraordinary item consisted
of the following:
Year Ended February 28 or 29,
---------------------------------------------
2001 2000 1999
---- ---- ----
United States $ 3,335,414 $ 4,607,045 $ 4,699,161
Foreign (1,015,216) 365,794 (808,826)
----------- ----------- -----------
Total $ 2,320,198 $ 4,972,839 $ 3,890,335
=========== =========== ===========
F-17
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the provision for income taxes are as follows:
Year Ended February 28 or 29,
---------------------------------------
2001 2000 1999
--------- ----------- -----------
Current:
Federal $ 623,400 $ 1,529,932 $ 1,132,178
State 99,296 261,602 200,431
Foreign 17,590 154,411 ---
--------- ----------- -----------
740,286 1,945,945 1,332,609
--------- ----------- -----------
Deferred:
Federal 437,943 143,823 217,144
State 44,052 (11,210) 7,047
Foreign (334,788) (127,111) (90,029)
--------- ----------- -----------
147,207 5,502 134,162
--------- ----------- -----------
Total income tax provision $ 887,493 $ 1,951,447 $ 1,466,771
========= =========== ===========
The tax effects of temporary differences which give rise to deferred tax assets
are as follows:
February 28, 2001 February 29, 2000
----------------- -----------------
Provision for doubtful accounts $ 45,661 $ 201,599
Accrued expenses 230,231 346,503
Fixed assets (177,621) (453,286)
Inventory 149,051 245,136
Net operating loss - U.S. 320,676 898,803
Foreign credit carryforwards and net operating loss 666,822 332,034
Other 188,761 ---
---------- ------------
Net deferred tax asset $1,423,581 $ 1,570,789
========== ===========
The Company has approximately $860,000 in net operating loss carryforwards which
expire in the years 2011 through 2018, all of which relates to the Company's
Fiscal 2000 acquisitions. The net operating loss carryforward is subject to
separate IRC Section 382 Limitation. The Section 382 limitation limits the
Company's utilization of its net operating losses to an annual amount after an
ownership change.
The Company has net operating losses in various foreign countries of
approximately $2,075,000, which have no limitation on their expiration.
The following is a reconciliation of the statutory federal income tax rate to
the effective rate reported in the financial statements:
Year Ended February 28 or 29,
-----------------------------
2001 2000 1999
---- ---- ----
Amount % Amount % Amount %
--------- ---- ---------- ---- ---------- ----
Provision for federal income taxes
at the statutory rate $ 788,867 34.0 $1,752,214 34.0 $1,322,714 34.0
State and local income taxes -
net of federal income tax benefit 79,351 3.4 176,252 3.4 133,990 3.4
Other 19,275 0.8 22,981 0.4 10,067 0.3
--------- ---- ---------- ---- ---------- ----
Actual provision $ 887,493 38.2 $1,951,447 37.8 $1,466,771 37.7
========= ==== ========== ==== ========== ====
Cash paid for income taxes was $1,503,754, $2,030,666 and $614,808 in fiscal
2001, 2000 and 1999, respectively.
F-18
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - SIGNIFICANT CUSTOMER AND VENDOR INFORMATION
1. Significant Customer Information
The Company sells products to a large number of customers which are
primarily in the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company's customer base
includes a high concentration of home center chains with one such
customer accounting for a total of 41%, 35% and 28%, of sales in fiscal
2001, 2000 and 1999, respectively. This same customer represented 29%
of accounts receivable at February 28, 2001 and February 29, 2000.
Although the Company is directly affected by the well-being of the home
center industry, management does not believe significant credit risk
exists at February 28, 2001.
2. Significant Vendor Information
The Company purchased approximately 19% and 15% of purchases for the
year ended February 28, 2001 and approximately 19% and 10% of purchases
for the year ended February 29, 2000 through two vendors. There were no
significant purchases from any one vendor for the year ended February
28, 1999.
NOTE R - SHAREHOLDERS' EQUITY
The Company is authorized to issue a maximum of 2,500,000 shares of $1 preferred
stock.
Series A
500,000 of the Company's 2,500,000 authorized shares of preferred stock, $1 par
value per share, are designated as Series A Preferred Stock. The holders of each
share of Series A Preferred Stock shall be entitled to receive, before any
dividends shall be declared or paid on or set aside for the Company's common
stock, out of funds legally available for that purpose, cumulative dividends in
cash at the rate of $.035 per share per annum through September 30, 2000,
payable in semiannual installments, accruing from the date of issuance of the
shares. Commencing October 1, 2000, the rate of dividends will equal the prime
interest rate on the first day of the month in which the dividends are payable,
less 1-1/4%.
The Company may redeem any or all of the shares of Series A Preferred Stock
outstanding at a price per share of $1.07 plus an amount equal to any accrued
but unpaid dividends thereon during the first year following the issuance of
such shares and such price shall be reduced by one percent (1%) each year
thereafter until $1.00 per share is reached. The Series A Preferred Stock has no
voting rights. During fiscal 1995, the Company issued 425,547 shares of Series A
preferred stock in connection with a business acquisition. In fiscal 1997,
106,387 of these shares were converted to 3,129 shares of common stock. At
February 28, 2001 and February 29, 2000, there were 319,160 shares of Series A
Preferred Stock issued and outstanding. There were $11,170 of dividends declared
and paid during the fiscal years 2001 and 2000.
Series B
1,000,000 of the Company's 2,500,000 authorized shares of preferred stock, $1
par value per share, are designated as Series B Preferred Stock. The holder of
each share of Series B Preferred Stock shall be entitled to receive, out of the
surplus of the Company, a non-cumulative dividend at the rate of $.05 per share
per annum, payable annually before any dividend shall be set apart for or paid
on the common shares for such years. The Series B Preferred Stock has no voting
rights. The Company may redeem any or all of the shares of Series B Preferred
Stock then outstanding at a price per share of $1.00. At February 28, 2001 and
2000, there were no outstanding shares of Series B preferred stock.
F-19
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series C
1,000,000 of the Company's 2,500,000 authorized shares of preferred stock, $1
par value per share, are designated as Series C Preferred Stock. The holder of
each share of Series C Preferred Stock shall be entitled to receive, before any
dividends shall be declared or paid on or set aside for the Company's common
stock, out of funds legally available for that purpose, cumulative dividends at
the rate of $.035 per share per annum, payable in annual installments, accruing
from the date of issuance of the shares. The Series C Preferred Stock has no
voting rights. The Company may redeem any or all of the shares of Series C
Preferred Stock then outstanding at a price per share of $1.00. During fiscal
year 1995, 17,500 shares of Series C Preferred Stock were issued in connection
with a business acquisition. In fiscal year 2001, the fiscal 2000 dividends of
approximately $600 were paid. In fiscal year 2001, dividends of approximately
$600 were declared and were unpaid at February 28, 2001.
Treasury Stock
Total common shares purchased in fiscal year 1996 and held in treasury were
15,152 shares for an aggregate cost $57,900. In fiscal 2001, pursuant to a
resolution passed by the Board of Directors, the Company repurchased 42,000
shares of common stock at an aggregate cost of $293,093.
NOTE S - STOCK OPTION PLAN
The Company has adopted a stock option plan (the "Plan") for employees,
consultants and directors of the Company. Stock options granted pursuant to the
Plan shall be authorized by the Board of Directors. The aggregate number of
shares which may be issued under the Plan shall not exceed 400,000 shares of
common stock. Stock options are granted at prices not less than 85% of the fair
market value on the date of the grant. All options granted, for the periods
presented, have been at fair market value. Option terms, vesting and exercise
periods vary, except that the term of an option may not exceed ten years.
The Company continues to account for options issued under the intrinsic value
method of APB 25. Had compensation cost been determined based on the fair value
at the grant date for stock option awards consistent with the provisions of SFAS
No. 123, the Company's net income and diluted earnings per share for the year
ended February 28 or 29, 2001, 2000 and 1999 would have been as follows:
(in thousands, except per share data)
2001 2000 1999
---- ---- ----
Net income
As reported $1,432 $3,202 $2,423
Pro forma $1,110 $3,064 $2,281
Net income per share
As reported $0.42 $1.19 $0.90
Pro forma $0.33 $1.14 $0.85
F-20
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value at date of grant for options granted during
2001, 2000 and 1999 was $1.94, $3.40 and $2.09 per option, respectively. The
fair value of each option at date of grant was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions for grants.
2001 2000 1999
---- ---- ----
Expected stock price volatility 33.7% 35.1% 32.0%
Expected lives of options
Directors and officers 3 years 3 years 3 years
Employees 3 years 3 years 3 years
Risk-free interest rate 5.9% 5.4% 6.2%
Expected dividend yield 0.0% 0.0% 0.0%
Weighted average exercise
Shares price
------ -----
Options outstanding at March 1, 1998 344,500
Exercised 0
Granted 135,750 $ 6.99
Cancelled or forfeited (28,750) $ 5.60
-------
Options outstanding at February 28, 1999 451,500
Exercised (37,500) $ 5.35
Granted 107,000 $ 6.40
Cancelled or forfeited (123,750) $ 6.63
--------
Options outstanding at February 29, 2000 397,250
Exercised (25,000) $ 5.54
Granted 36,000 $ 6.45
Cancelled or forfeited (16,187) $ 6.30
--------
Options outstanding at February 28, 2001 392,063
=======
Options currently exercisable 283,604 $ 6.07
=======
F-21
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
as of February 28, 2001:
Weighted average
Range of exercise Number remaining Weighted average Number Weighted average
prices outstanding contractual life exercise price exercisable exercise price
------ ----------- ---------------- -------------- ----------- --------------
$4.16 - $7.25 392,063 4.18 $ 6.19 283,604 $ 6.07
NOTE T - NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 2001, the Company acquired certain businesses. In connection with
these acquisitions, liabilities were assumed as follows:
Cash paid $ 1,116,517
Liabilities assumed 75,710
Issuance of note to related seller 1,620,000
------------
Purchase Price $ 2,812,227
Fair value of net assets acquired 2,305,131
------------
Excess of purchase price over fair
value of net assets acquired $ 507,096
============
Also, during fiscal 2001, the Company made certain capital expenditures as
follows:
Total capital expenditures $ 2,885,675
Amounts representing capital leases and other
secured financing (866,882)
-------------
Capital expenditures paid in cash $ 2,018,793
============
During fiscal 2000, the Company made six strategic acquisitions. In connection
with these acquisitions, liabilities were assumed as follows:
Cash paid $ 2,668,000
Liabilities assumed 3,105,061
Issuances of notes to related sellers 2,985,000
------------
Purchase Price $ 8,758,061
Fair value of net assets acquired 5,258,061
------------
Excess of purchase price over fair
value of net assets acquired $ 3,500,000
============
NOTE U - NEW ACCOUNTING PRONOUNCEMENTS
In 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting of Derivative Instruments and Hedging Activities," was issued and in
June 2000, SFAS No. 138 was issued which awards and clarifies certain guidance
in SFAS No. 133. These statements establish new accounting and reporting
standards for derivative financial 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 must implement SFAS No. 133 by the first quarter of
fiscal 2002. The Company has evaluated the requirments of SFAS No. 133 and
adoption will 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 08-22, "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 is required
to adopt EITF No. 00-22 and 00-25 in the first quarter of 2002. The Company has
reviewed the requirements and has determined that it is currently in compliance
with the consensuses and will not have a significant impact on the Company's
financial position or results of operations.
F-22
SUPPLEMENTAL FINANCIAL DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly results for the two years ended February 28, 2001 are set forth in
the following table:
Earnings
Net Earnings (Loss) per
2001 Sales Gross Profit (Loss) share
---- ----- ------------ ------ -----
First quarter $ 31,560,138 $ 9,804,515 $ 942,845 $ 0.28
Second quarter 28,181,108 9,373,214 855,029 0.25 (1)
Third quarter 26,306,248 7,605,955 (796,785) (0.24) (1) (2)
Fourth quarter 26,836,593 9,160,648 431,616 0.13 (1)
------------- ----------- ----------- -----
Total $ 112,884,087 $35,944,332 $ 1,432,705 $0.42
============= =========== =========== =====
2000
----
First quarter $ 27,167,061 $ 8,444,634 $ 772,831 $ 0.23
Second quarter 29,092,177 8,431,399 701,599 0.21
Third quarter 28,230,599 8,667,992 956,406 0.29 (3)
Fourth quarter 29,081,638 8,990,815 772,115 0.22
------------- ----------- ----------- -----
Total $ 113,571,475 $34,534,840 $ 3,202,951 $0.95
============= =========== =========== =====
(1) Includes the impact on sales resulting from the Company's decision
to license the rights of its tackless carpet strip product to U.S.
flooring products distributors. Quarterly sales of this product to
distributors in fiscal 2001 and fiscal 2000 were approximately as
follows:
Fiscal Fiscal
2001 2000
---------- -----------
First quarter $2,956,513 $ 3,437,058
Second quarter --- 3,856,012
Third quarter --- 3,272,987
Fourth quarter --- 3,548,087
---------- -----------
Total $2,956,513 $14,114,144
========== ===========
(2) Includes the impact of additional sales incentives offered by the
Company to one of its major customers, certain non-recurring
charges related to the Company's decision to relocate its
California manufacturing facility to Nevada and a downsizing of
the Company's Holland subsidiary to improve performance. In
connection with these decisions, the Company expensed
approximately $2,000,000 of non-recurring charges in the third
quarter of fiscal 2001. The resultant effect on earnings per share
was a reduction of $0.37 after tax.
(3) During the third quarter of fiscal 2000, the Company repurchased
approximately $1,229,000 of its 8% Subordinated Debentures issued
in 1997 to mature on April 1, 2001. the transaction resulted in an
extraordinary gain from the early extinguishment of debt
approximating $182,000 or $0.06 per share.
F-23
Q.E.P. CO., INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions end
Description of period expenses accounts (a) of period
----------- --------- -------- -------- ------------- ---------
Year ended February 29, 1999
Deducted from asset accounts
Allowance for doubtful accounts $480,000 $65,133 --- $163,505 $381,628
Year ended February 29, 2000
Deducted from asset accounts
Allowance for doubtful accounts $381,628 $277,734 (b) 191,466 $110,290 $740,538
Year ended February 28, 2001
Deducted from asset accounts
Allowance for doubtful accounts $740,538 $127,119 --- $205,831 $661,826
(a) Accounts written off as uncollectable, net of recoveries.
(b) Reserve associated with the Fiscal 2000 acquisitions at the date of
acquisition.
S-1
EXHIBIT INDEX
10.3.6 Subordinated Loan and Security Agreement, dated April 5, 2001, by and
between The HillStreet Fund, L.P. and the Company, including
Subordinated Term Promissory Note dated April 5, 2001, Warrant
Agreement dated April 5, 2001, and Warrant dated April 5, 2001
10.3.7 Fourth Agreement of Amendment, dated April 5, 2001, by and between
Fleet Capital Corporation and the Company, including 2001 Term Note
dated April 5, 2001, Guaranty of Lewis Gould dated April 5, 2001,
Amended Trademark Collateral Security Agreement April 5, 2001, Amended
Patent Collateral Security Agreement April 5, 2001, form of Stock
Pledge Agreement executed by each of the Company and certain of its
subsidiaries, and form of Individual Security Agreement executed by
the following Company subsidiaries: Q.E.P. Stone Holdings, Inc.,
Boiardi Products Corporation, and Q.E.P. Zocalis Holding LLC
10.3.8 Intercreditor and Subordination Agreement, dated April 5, 2001, by and
between Fleet Capital Corporation, The HillStreet Fund, L.P., and the
Company and its subsidiaries
21 Subsidiaries of the Company