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10-K
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, 1998
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 nonaffiliates as of
May 4, 1998 is $12,044,037, 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, 1998 is: 2,654,894 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 17, 1998, are incorporated by
reference in Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1979, Q.E.P. Co., Inc. (the "Company" or "QEP") manufactures, markets
and distributes a broad line of specialty tools and related products for the
home improvement market. Under brand names including QEP(TM), O'TOOL(TM),
ROBERTS(TM) and ANDREWS TOOLS(TM), the Company markets over 4,000 specialty
tools and related products used primarily for surface preparation and
installation of ceramic tile, carpet, marble, masonry, drywall and paint. QEP's
products include trowels, floats, tile cutters, wet saws, spacers, nippers,
pliers, carpet trimmers and cutters, carpet adhesives, seaming tape, tack strip,
knives and abrasives. These products are sold to home improvement retailers,
including national and regional chains such as Home Depot, Lowe's and
Hechinger/Home Quarters/Builders Square; specialty distributors to the hardware,
construction, flooring and home improvement trades; and chain or independent
hardware, tile, carpet and painting retailers. In addition, the Company sells to
original equipment manufacturers ("OEMs") such as Stanley Tools and Red Devil.
The Company has experienced significant growth in net sales since fiscal 1994,
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 OEMs, and (v) growth of
the home improvement market as a whole.
In October 1997, the Company acquired Roberts Consolidated Industries, Inc.
("Roberts Consolidated") a company engaged in the manufacture and sale of carpet
installation products, including carpet adhesives and installation tools. As a
result of the acquisition of Roberts Consolidated, the Company expanded its
product lines, increased its distribution channels and broadened its customer
base. Roberts Consolidated sells its products primarily to flooring distributors
throughout the world. Roberts Consolidated operates three leased manufacturing
facilities: one in City of Industry, California; one in Mexico, Missouri; and
one in Bramalea, Ontario, Canada.
In January 1998, the Company acquired Roberts Holland BV ("Roberts Holland"), a
company headquartered in Rotterdam, Holland with subsidiaries in Germany, France
and the United Kingdom. Roberts Holland produces and markets flooring
installation tools and related products. This acquisition expanded the Company's
manufacturing capabilities by providing a manufacturing base in Europe. Prior to
being acquired by the Company, Roberts Consolidated and Roberts Holland were
unrelated entities.
MARKET OVERVIEW
The Company is a supplier of specialty flooring installation products and sells
to the home improvement market. According to industry information published by
the National Home Center News ("NHCN"), the United States home improvement
market generated retail sales of over $142 billion in 1996 (the most recent year
for which data is available to the Company). NHCN projects that these sales will
reach approximately $190 billion by the year 2000. While this data reflects the
broad trend in the home improvement market in general, the Company believes that
the trends within the specialty flooring segment are similar.
The Company believes that growth in the home improvement market is being driven
by several factors, including (i) aging 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, with "baby boomers" now reaching the 35 to 54 year old age category
which historically has accounted 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 such as Home Depot and Lowe's. 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 46.1% of all home improvement sales in 1996. 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 27.6% and 21%, respectively, from 1992 to 1997, and
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 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. During fiscal 1998, the Company
completed the acquisition of Roberts Consolidated and Roberts Holland. Through
its acquisitions, the Company has broadened its product line, 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. In order to focus on its core business, the Company also sold
certain assets of its subsidiary, Marion Tool Company, which was engaged in the
manufacturing of striking tools such as hammers. The Company also sold the right
to do business under the Marion name.
INCREASE SALES BY EXPANDING PRODUCT LINES AND ADDING NEW CUSTOMERS. The Company
seeks to expand its product lines by introducing new products which can be
marketed to the Company's existing customer base. Through the acquisition of
Roberts Consolidated and Roberts Holland the Company expanded its line of
flooring installation products, thereby increasing the number of products
available to be offered to existing customers. In addition to expanding product
offerings through acquisitions the Company intends to internally develop and
offer new products in response to customer demands. The Company believes that
broadening its product lines will make the Company a more attractive supplier to
the major home improvement retailers and specialty distributors, and thereby
increase the Company's sales and market penetration.
CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. Primarily as a result of recent
strategic acquisitions, 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 product lines complementary to those of
the Company 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. The Company believes that the international
markets provide a significant opportunity to increase sales of its products.
Through the acquisition of Roberts Holland, the Company acquired
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manufacturing and warehousing facilities in Europe. 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. The Company intends to
pursue international sales opportunities through marketing initiatives and joint
ventures.
ENHANCE MANUFACTURING CAPABILITIES. The Company currently has over 500,000
square feet of manufacturing capability located throughout the United States, in
Canada and Holland. The Company manufactures approximately 60% of its products.
During fiscal 1998, the Company increased its manufacturing capacity for certain
plastic extruded products formerly purchased by the Company from outside
suppliers.
PRODUCTS
The Company manufactures and distributes a broad line of over 4,000 specialty
tools and related products. The Company's products are offered under brand names
including QEP(TM), O'TOOL(TM), ANDREWS TOOLS(TM), and ROBERTS(TM) and are used
primarily for surface preparation and installation of ceramic tile, carpet,
marble, masonry, drywall and paint. The following table sets forth certain
information concerning the Company's principal product groups and their markets,
distribution channels and price positioning.
TOOL OR RELATED PRODUCT GROUP
-----------------------------
TILE CARPET
---- ------
MARKETS
Primary Do-it-yourself Professional
Secondary Professional Do-it-yourself
DISTRIBUTION CHANNELS
Primary Home improvement retailers Distributors
Secondary Tile retailers and distributors Home improvement retailers
PRODUCT OFFERINGS Full line Full line
As a result of the acquisition of Roberts Consolidated and Roberts Holland, the
Company began manufacturing and distributing adhesives, carpet seaming tape,
tack strip and an expanded assortment of carpet installation tools. A
significant amount of these products are sold to distributors for end-use
primarily by installation and construction professionals. Prior to these
acquisitions, while a portion of Q.E.P.'s products which included floats, tile
cutters, electric saws, nippers and sanders were sold to professionals, the
Company's products were predominantly sold to home improvement retailers for use
by the "do-it-yourself" customer. Although the Company manufacturers 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 limited 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 also maintains a product quality control
program, primarily to verify the quality of its products and to develop
additional adhesive products.
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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, and Lowe's 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 37% and 6% of the Company's
fiscal 1998 net sales, respectively.
Because of the importance of home improvement retailers (including Home Depot
and Lowe's) to the Company, 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, including
assistance with inventory, maintenance of product displays and 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;
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 large regional home improvement
retailers, especially Home Depot and Lowe's, will continue to increase their
market share in the near future. While each of Home Depot and Lowe's has
announced plans to increase significantly the number of stores each operates
over the next several years, as a result of the expansion of the Company's
distribution channels through the acquisition of Roberts Consolidated and
Roberts Holland, the effect of this expansion on the Company will not be as
significant as in the past.
MANUFACTURING AND SUPPLIERS
The Company estimates that in fiscal 1998 products it manufactured accounted for
approximately 40.7% of net sales. The Company manufactures adhesives, carpet
seaming tape, and carpet installation tools at its main manufacturing facilities
in Mexico, Missouri; City of Industry, California; and Rotterdam, Holland. The
Company also produces carpet adhesives at its facilities in City of Industry,
California and Toronto, Canada. Each of these manufacturing facilities were
added as a result of recent acquisitions. The Company's ceramic tile tools
continue to be manufactured at its facility in Boca Raton, Florida, as well as
in its newly acquired Mexico, Missouri facility. In an effort to further expand
its manufactured products, the Company recently began manufacturing plastic tile
spacers and trim at its Florida facility.
The Company purchased finished products and components from approximately 240
different suppliers in fiscal 1998. Although the Company believes that multiple
sources of supply exist for nearly all of the products and components purchased
from outside suppliers, and although the Company 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 in-house sales staff;
(ii) independent manufacturing representatives; (iii) an in-house
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telemarketing sales force; and (iv) outside salaried and commissioned sales
representatives. Management estimates that sales through its primary
distribution channels in fiscal 1998 were as follows: 51.1% to national and
regional home improvement retailers; 38.7% to specialty distributors; and 10.2%
to OEMs, export 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 reinforce the Company's brand images.
During 1998, the Company produced the first new catalog of ROBERTS(TM) products
in five years. During fiscal 1999, the Company intends to produce and develop
new Q.E.P.(TM) and O'Tool(TM) product catalogs. The Company has developed a
direct mail marketing program under which approximately 2,500 brochures are
mailed to customers, usually on a monthly basis.
The Company's marketing and sales representatives, or its manufacturers'
representatives, conduct monthly visits to many customers' individual retail
stores. In addition, the Company 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 product market is
based primarily on product quality, delivery capabilities, brand name
recognition, and availability of retail shelf space. 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 home improvement industry include a number of large, well-capitalized home
improvement product manufacturers that could, should they so choose, market
products in direct competition with the Company. Should these companies
determine to enter additional market segments in which the Company currently
operates, the competitive pressures experienced by the Company could be
increased. The Company is aware of a number of foreign competitors, many of
which may have greater financial, marketing and other resources than the
Company. While foreign sales constituted less than 6.6% of the Company's total
sales during fiscal 1998, as the Company seeks to penetrate more foreign
markets, the Company may experience competition from such 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, as well as handling
5
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 owned and 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.
Except as described below, 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.
ROBERTS CONSOLIDATED. The Company is aware of three situations, each relating to
Roberts Consolidated, which could potentially result in the Company incurring
liability under Environmental Laws. In March, 1998, Roberts Consolidated
received notification that it had been identified as a potentially responsible
party ("PRP") pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA") and related state laws for the
clean up of contamination resulting from past disposal of hazardous waste at a
site to which Roberts Consolidated, among others, sent waste in the past. The
Company has been named a defendant in a lawsuit filed with respect to this
matter. Based on information currently available, the Company does not believe
that its liability for this matter will be material to the Company. However,
because this matter is at a preliminary stage, it is impossible for the Company
to predict with certainty the extent of liability that it could incur. CERCLA
requires PRPs to pay for cleanup of sites from which there has been a release or
threatened release of hazardous substances. Courts have interpreted CERCLA to
impose strict, joint and several liability upon all persons liable for cleanup
costs. As a practical matter, however, at sites where there are multiple PRPs,
the costs of cleanup typically are allocated among the parties according to a
volumetric or other standard.
In May, 1998, the Company received notice from the U.S. Environmental Protection
Agency (the "EPA") stating that Roberts Consolidated had been designated a "de
minimis" waste generator to a site located in Montery Park, California.
According to the notice, "de minimis" waste generators are parties whose
contribution of hazardous waste to the site is small compared to the amount of
waste contributed by the approximately 300 major waste generators. The notice
further provided that the EPA intends to make an offer of settlement to Roberts
Consolidated in this matter. As of the date of this report, the offer of
settlement has not yet been received by Company. At this time it is not possible
for the Company to predict the extent of liability, if any, it could incur in
this matter.
Prior to the acquisition of Roberts Consolidated, the Company conducted
preliminary environmental testing of the Roberts Consolidated Canada facility
which revealed the existence of possible environmental contamination. After the
acquisition, the Company retained an environmental consulting firm to conduct
further testing. The results of this testing indicate that both soil and ground
water contamination exist on this site and that contamination has spread to
neighboring properties. Pursuant to the terms of an escrow agreement entered
into between the Company and the sellers of Roberts Consolidated, a portion of
the Company's 8% Subordinated Debentures issued as consideration to the sellers
of Roberts Consolidated was placed in escrow to satisfy any claims for
indemnification made by the Company against the sellers pursuant to the terms of
the acquisition agreement. Pursuant to the acquisition agreement, the Company is
entitled to indemnification for any losses incurred by the Company as a result
of any misrepresentation or any breach of warranty or agreement made by the
sellers under the acquisition agreement. In April 1998, the Company notified the
escrow agent that it was entitled to indemnification under the acquisition
agreement and asserted a claim for the entire balance of the 8% Subordinated
Debentures remaining in escrow to offset future expenditures in connection with
required environmental clean up at the Canada facility. The
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sellers are challenging the Company's claim for indemnification. The balance of
the 8% Subordinated Debentures that remained in escrow at the time the Company
asserted its claim for indemnification was $250,000. There can be no assurance
that the costs incurred by the Company in connection with environmental clean up
of the Canada facility will not exceed $250,000 or that the sellers will not be
successful in their challenge of the Company's claim against the 8% Subordinated
Debentures. At the date of acquisition, the Company recorded a reserve for
potential environmental liabilities associated with the Roberts Companies. The
Company will continue to assess its liability and begin the clean up process
during fiscal 1999. Because this matter is still at a preliminary stage, the
Company cannot predict with certainty the extent of liability, if any, that it
could incur.
MARION TOOL COMPANY. In October 1994, the Company acquired all of the
outstanding common stock of Marion Tool Company. At the same time, the Company
acquired certain real property used for manufacturing, warehouse and foundry
operations of Marion Tool Company in Marion, Indiana. Based upon the results of
a series of environmental reports obtained by the Company prior to completing
the acquisition, above ground storage tanks from which some petroleum
contamination was evident were removed at the time of the acquisition and the
Company caused contaminated soil to be removed in accordance with applicable
Environmental Laws. Because of the proximity of soil contamination to several
structures and improvements at the site and the risk that removal could
undermine the structures, not all contaminated soil was removed. A report of the
excavation results was submitted to the Indiana Department of Environmental
Management and, based upon its discussions with such department, the Company
believes that no further action will be required concerning the remaining
contamination. There can be no assurance, however, that further action with
respect to the remaining contamination will not be required.
Marion Tool Company was also identified as a PRP pursuant to CERCLA for the
cleanup of contamination resulting from past disposal of hazardous wastes at a
certain site to which Marion Tool Company, among others, sent wastes in the
past. Based upon, among other things, a review of the data available to the
Company regarding the site at which Marion Tool Company is alleged to have
deposited a portion of the waste located thereon, and a comparison of the
potential liability at this site to settlements reached by other parties in
similar cases, the Company believes that Marion Tool Company's liability for
this matter will not be material to the Company. While the Company is not aware
of any facts which would give rise to any other potential off-site liability on
the part of Marion Tool Company, if other disposal sites where Marion Tool
Company sent waste were determined to require cleanup under CERCLA or other
similar laws, Marion Tool Company could face similar claims in the future. The
Company has not received notice of any claims relating to disposal of waste by
Marion Tool Company at any other sites.
Pursuant to the terms of the acquisition agreement entered into between the
Company and the sellers of Marion Tool, the Company received joint and several
indemnification from the sellers for breaches of representations and warranties
in the acquisition agreement. In addition, the Company and the sellers of Marion
Tool entered into an escrow agreement pursuant to which the sellers deposited
the shares of the Company's Series A Preferred Stock issued to them in
connection with the acquisition into an escrow account for payment of
indemnification claims. An aggregate of 319,160 shares of Series A Preferred
Stock remain in the escrow account. The escrow agreement expires in August 2000
at which time all shares remaining therein will be released to the sellers. To
date, the Company has not notified the escrow agent of a violation of any
environmental laws or regulations, or any situation requiring remedial action by
the Company, or any other violation of a representation or warranty, pursuant to
which the Company claims the right to the return of any of the Series A
Preferred Stock.
Although the Company believes that any environmental liabilities incurred as a
result of the previous activities of Marion Tool Company will be materially less
than the liquidation preference of the shares of Series A Preferred Stock that
are held in escrow, there can be no assurance that the value of the shares held
in escrow will be sufficient to address all environmental liabilities incurred
as a result of the prior activities of Marion Tool Company.
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INTELLECTUAL PROPERTY
The Company markets its specialty tools and related products under various
trademarks owned by the Company or its subsidiaries, including QEP(R),
O'TOOL(TM), ROBERTS(TM) and ANDREWS TOOLS(TM). The Company also owns MARION
TOOL(TM), the rights of which it has transferred to an unrelated third party
under the terms of an asset sale agreement. The Company has devoted substantial
time, effort and expense to the development of brand name recognition and
goodwill for products sold under its trademarks, and 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 steaming products. Although these patents are important to
the operations of Roberts Consolidated, the Company does not believe that the
loss of any one or more of these patents would have 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 1, 1998, the Company had 362 employees, including 84 administrative
employees, 47 sales and marketing employees, 145 manufacturing employees and 86
employees engaged in packaging and shipping. Eight of these employees work part
time. The Company has not experienced any work stoppages. Other than a small
group of employees at the California location, none of the Company's other
employees are represented by a union. The Company considers its relations with
the employees to be good.
ITEM 2. PROPERTIES
The Company currently leases facilities located in the United States, Canada and
Europe which consist of an aggregate of approximately 539,000 square feet. In
addition, the Company owns a 40,000 square foot manufacturing facility in
Marion, Indiana, which was purchased at the time of the acquisition of Marion
Tool Company. The following table sets forth certain information concerning
facilities leased and owned by the Company.
SQUARE ANNUALIZED LEASE RENEWAL
LOCATION USE FEET COST EXPIRATION OPTION
-------- --- ---- ---- ---------- ------
Boca Raton, FL Executive offices;
warehouse 77,000 $342,027 01/31/04 --
Marion, IN Manufacturing; warehouse;
assembly 40,000 N/A N/A --
Carson, CA Administrative; sales;
marketing; warehouse 29,200 100,850 08/14/99 --
Sliedrecht, Holland Administrative; sales;
manufacturing 13,500 107,500 11/01/02 --
Sliedrecht, Holland Warehouse 7,500 83,333 01/01/02 --
Morfelden, Germany Administrative;
warehouse 13,300 94,219 04/01/00 --
Morfelden, Germany Administrative; sales 300 8,478 10/01/00 --
Plaisir, France Administrative; warehouse 1,700 27,100 Yearly --
City of Industry, Administrative; warehouse;
California manufacturing 150,820 607,353 03/31/01 Y
Mexico, Missouri Administrative; warehouse;
manufacturing 155,000 305,957 03/31/03 Y
Bramalea, Ontario Administrative; warehouse;
manufacturing 51,000 129,346 05/31/03 --
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary 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.
8
Roberts Consolidated has been named as a defendant in CARGILL, INC. ET AL. V.
ABCO CONSTRUCTION ET AL., a lawsuit filed in the United States District Court
for the Southern District of Ohio Western Division on January 29, 1998. The
lawsuit, brought under CERCLA and related state environmental laws, alleges that
Roberts Consolidated and the other defendants disposed of hazardous substances
at a site located in Dayton, Ohio. The plaintiffs are seeking monetary damages
against the defendants, primarily in an amount equal to their respective
equitable share of the cost of the environmental clean up of the site. Based on
preliminary investigations, the Company believes that the entity identified as
Roberts Consolidated, named a defendant in this lawsuit, is neither the same
entity nor a predecessor to the entity acquired by the Company. At this time,
the Company is continuing to review the facts underlying this lawsuit in order
to conclusively determine if the Roberts Consolidated subsidiary of the Company
is a proper party thereto.
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 tier
of the Nasdaq Stock Market. The following table sets forth the high and low
sales price per share for the Common Stock for each quarter during fiscal year
1998, as reported on the Nasdaq National Market System.
FISCAL YEAR ENDED FEBRUARY 28, 1998 HIGH LOW
- ----------------------------------- ---- ---
First Quarter 9 6 1/4
Second Quarter 9 1/2 7 1/4
Third Quarter 10 5/8 8 1/4
Fourth Quarter 9 7 1/4
On May 4, 1998, the closing price of the Common Stock on the Nasdaq National
Market System was $9.125 per share. As of that date, there were 33 holders of
record of the Common Stock and approximately 810 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, restrictions imposed by the terms of indebtedness, considerations
imposed by applicable law and other factors deemed relevant by the board of
directors.
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal 1998, the Company issued options to acquire an aggregate of
112,200 shares of its Common Stock. Options issued to employees of the Company
were both incentive stock options and non-qualified options, while options
issued to directors of the Company were non-qualified options. An aggregate of
73,000 options were issued to the officers and directors, while the remaining
39,200 options were issued to 26 employees of the Company. The exercise prices
for such options are between $6.375 and $8.00. At February 28, 1998, 45,300 of
the stock options issued during 1998 were exercisable while the balance will
become exercisable during fiscal 1999. No consideration was received by the
Company in connection with the issuance of such options. The Company relied on
section 4(2) of the Securities Act of 1933 with respect to the issuance of
options to all such persons.
9
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data as of and
for each of the years in the five year period ended February 28, 1998. This
information is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements and the notes thereto which are
included elsewhere in this report.
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
---------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------ ----
OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales............................................ $ 13,407 $ 19,247 $ 25,272 $ 33,140 $ 53,691
Cost of goods sold................................... 8,416 12,105 15,977 20,119 35,954
------- ------- ------- ------ ------
Gross profit......................................... 4,991 7,142 9,295 13,021 17,737
Shipping............................................. 1,113 1,488 1,746 2,440 4,020
General and administrative........................... 1,492 2,436 3,106 4,048 5,207
Selling and marketing................................ 1,218 1,800 2,512 3,569 4,843
Foreign exchange losses.............................. 153 115 --- 11 2
------- ------- ------- ------ ------
Total expenses.............................. 3,976 5,839 7,364 10,068 14,072
------- ------- ------- ------ ------
Operating income..................................... 1,015 1,303 1,931 2,953 3,665
Interest expense, net................................ 135 149 195 7 373
------- ------- ------- ------ ------
Income before provision for income taxes and cumulative
effect of change in accounting principle.... 880 1,154 1,736 2,946 3,292
Provision for income taxes........................... 341 429 668 1,143 1,282
------- ------- ------- ------ ------
Net income........................................... $ 539 $ 725 $ 1,068 $ 1,803 $ 2,010
======== ======== ======== ======== ========
Basic and diluted earnings per share................. $ .36 $ .47 $ .70 $ .89 $ .75
======== ======== ======== ========= ========
Weighted average number of shares of common
stock outstanding........................... 1,515 1,515 1,506 2,012 2,677
===== ===== ===== ===== =====
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital...................................... $ 1,019 $ 1,948 $ 2,931 $ 12,695 $ 14,212
Total assets......................................... 4,133 6,000 7,971 16,434 43,026
Total liabilities.................................... 2,798 3,502 4,545 2,981 27,393
Shareholders' equity................................. 1,335 2,498 3,425 13,453 15,633
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 related products for the home improvement market. The Company markets
over 4,000 products primarily used for surface preparation and installation of
ceramic tile, carpet, marble, masonry, drywall and paint. The Company's products
are sold through home improvement retailers, specialty distributors, original
equipment manufacturers and chain or independent hardware, tile, carpet and
painting retailers for use by the do-it-yourself consumer as well as the
construction or remodeling professional. Dollar figures set forth below are
rounded to the nearest thousand.
RESULTS OF OPERATIONS
FISCAL 1998 AS COMPARED TO FISCAL 1997
Net sales for the 12 months ended February 28, 1998 ("fiscal 1998", or the
"fiscal 1998 period") were $53,691,000 compared to $33,140,000 for 12 months
ended February 28, 1997 ("fiscal 1997", or the "fiscal 1997 period"), an
increase of $20,551,000 or 62%.
This increase was primarily the result of sales from the Company's newly
acquired subsidiaries, Roberts Consolidated and Roberts Holland. Although
selling prices remained relatively stable, there was an increase in volume of
sales to home center retailers and independent distributors. This was due to an
increase in market penetration by these customers and new store openings by
major home center chain customers.
Gross profit for fiscal 1998 was $17,737,000 compared to $13,021,000 for fiscal
1997, an increase of $4,716,000 or 36.2%. As a percentage of net sales, gross
profit decreased to 33% in fiscal 1998 from 39.3% in fiscal 1997. This decrease
was a result of the acquisition of Roberts Consolidated which has historically
had lower gross profit margins than the Company.
Shipping expenses for the fiscal 1998 period were $4,020,000 compared to
$2,441,000 for the fiscal 1997 period, an increase of $1,579,000 or 64.7%. As a
percentage of net sales, these expenses increased to 7.5% in the fiscal 1998
period from 7.4% in the fiscal 1997 period. Approximately 74% of this increase
was a result of the Roberts Consolidated acquisition, and the balance was
attributable to increased sales volume and an increase in freight rates charged
by common carriers.
General and administrative expenses for the fiscal 1998 period were $5,206,000
compared to $4,048,000 for the fiscal 1997 period, an increase of $1,158,000 or
28.6%. As a percentage of net sales, these expenses decreased to 9.7% from 12.2%
in the fiscal 1997 period reflecting the leveraging of these costs over greater
sales. The actual increase in these expenses was primarily the result of
increased costs associated with the addition of the personnel from Roberts
Consolidated.
Selling and marketing costs for the fiscal 1998 period increased to $4,843,000
from $3,569,000 in the fiscal 1997 period, an increase of $1,274,000 or 35.7%.
As a percentage of net sales, these expenses decreased to 9% in the fiscal 1998
period from 10.8% in the fiscal 1997 period. The percentage decrease was a
result of lower selling and marketing costs as a percentage of sales at Roberts
Consolidated. This was a result of the small sales force maintained by Roberts
Consolidated prior to the acquisition. Approximately 74% of the increase in the
actual amount of these expenses is attributable to the Roberts Consolidated
acquisition, and the balance is primarily attributable to an increase in
commissions paid to sales personnel and an increase in marketing programs.
Interest income and interest expense increased $65,000 and $430,000,
respectively, during the fiscal 1998 period compared to the fiscal 1997 period.
Interest income increased due to the investment of the Company's excess cash,
which was primarily available prior to the acquisition of Roberts Consolidated.
Interest expense increased as a result of the increase in borrowings associated
with the acquisition of Roberts Consolidated.
Provision for income taxes was $1,282,000 in fiscal 1998 compared to $1,143,000
in fiscal 1997, an increase of $139,000 or 12.2%. The increase was the result of
an increase in the Company's taxable income as the effective rate
11
remained relatively consistent, increasing to 38.9% in fiscal 1998 from 38.8% in
fiscal 1997.
Net income for the fiscal 1998 period increased to $2,010,000 compared to
$1,803,000 in fiscal 1997, an increase of $207,000 or 11.5%. Net income as a
percentage of sales decreased to 3.7% in fiscal 1998 compared to 5.4% in fiscal
1997, reflecting a lower gross profit margin and higher shipping and
interest expenses, offset by lower general and administrative and selling and
marketing expenses as a percentage of sales as described above.
RESULTS OF OPERATIONS
FISCAL 1997 AS COMPARED TO FISCAL 1996
Net sales for fiscal 1997 were $33,140,000, compared to $25,272,000 for the
twelve months ended February 29, 1996 ("fiscal 1996" or the "fiscal 1996
period"), an increase of $7,868,000 or 31.1%. The increase is primarily the
result of greater sales to home center retailers, specialty retailers and
independent distributors, resulting from increased market penetration, new store
openings by major home center chain customers and sales of new products.
Gross profit for fiscal 1997 was $13,021,000, compared to $9,295,000 for fiscal
1996, an increase of $3,726,000 or 40.1%. As a percentage of net sales, gross
profit increased to 39.3% in fiscal 1997 from 36.8% in fiscal 1996. The increase
in gross profit margin was primarily due to the Company's ability to reduce its
costs by purchasing from additional sources at lower prices and by increased
sales of higher margin products to its major customers.
Shipping expenses for the fiscal 1997 period were $2,441,000, compared to
$1,746,000 for the fiscal 1996 period, an increase of $695,000 or 39.8%. As a
percentage of net sales these expenses increased to 7.4% in the fiscal 1997
period from 6.9% in the fiscal 1996 period. The increase in these expenses is
primarily due to additional labor costs required to handle increased volume.
Freight costs also increased because of additional product volume and increased
freight rates charged by common carriers.
General and administrative expenses for the fiscal 1997 period were $4,048,000,
compared to $3,106,000 for the fiscal 1996 period, an increase of $942,000 or
30.3%. As a percentage of net sales these expenses decreased to 12.2% in the
fiscal 1997 period from 12.3% in the fiscal 1996 period. The increase in these
expenses was primarily due to increased administrative costs related to the
Company's continuing growth and the costs related to the relocation of Company
facilities from Mahwah, NJ, Carson City, NV, Boca Raton, FL and Pompano Beach,
FL to the Company's new headquarters facility in Boca Raton, FL.
Selling and marketing costs for the fiscal 1997 period increased to $3,569,000
from $2,512,000 in the fiscal 1996 period, an increase of $1,057,000 or 42.1%.
As a percentage of net sales these expenses increased to 10.8% in the fiscal
1997 period from 9.9% in the fiscal 1996 period. The increase in these expenses
is primarily the result of additional sales personnel and increased commissions,
as well as an increase in the Company's advertising and marketing programs.
Interest expense, net, decreased from $195,000 in fiscal 1996 to $7,000 in
fiscal 1997, a decrease of $188,000 or 96.4%. The primary reason for the
decrease was the application of a portion of the proceeds of the Company's
initial public offering to repay the Company's bank debt. The balance of the
proceeds has been invested resulting in interest income.
Provision for income taxes was $1,143,000 in fiscal 1997 compared to $668,000 in
the fiscal 1996 period, an increase of $475,000 of 71.1%. This increase is a
direct result of the increase in the Company's taxable income as the Company's
effective tax rate remained relatively consistent at 38.8% in fiscal 1997
compared to 38.5% in fiscal 1996.
Net income for fiscal 1997 increased to $1,803,000, compared to $1,068,000 in
fiscal 1996, an increase of $735,000 or 68.8%. Net income as a percentage of net
sales increased to 5.4% in the fiscal 1997 period compared to 4.2% in the fiscal
1996 period for the reasons described above.
12
LIQUIDITY AND CAPITAL RESOURCES
Working capital for the fiscal 1998 period increased from $12,695,000 in
February 28, 1997 to $14,212,000 in February 28, 1998, an increase of $1,517,000
or 11.9%, primarily as a result of the Company's operations. Any cash in excess
of anticipated requirements is invested in commercial paper or overnight
repurchase agreements with a financial institution. Net cash used in operating
activities was $225,000 in fiscal 1998 compared to $605,000 in fiscal 1997. This
was a result of an increase in accounts receivable associated with the increase
in sales. The decrease in accounts payable at Roberts Consolidated and the
increase in prepaid expenses also contributed to the decrease in cash provided
by operations.
The Company utilized $21,735,000 on investing activities during fiscal 1998,
primarily for the acquisition of Roberts Consolidated and Roberts Holland;
$772,000 was spent on capital expenditures during fiscal 1998 compared to
$214,000 in fiscal 1997.
In connection with the acquisition of Roberts Consolidated, the Company issued
$7,500,000 of subordinated debentures. These debentures mature on April 1, 2001
and bear interest at 8%. They were recorded at their fair value on the date of
issuance in the amount of $6,515,000 and the discount will be amortized over the
life of the debentures. During fiscal 1998, the Company entered into a revolving
credit and term loan facility with one financial institution. The revolving
credit facility permits borrowings of up to $10,000,000 against a fixed
percentage of eligible accounts receivable and inventory as defined. Interest is
payable at LIBOR +1.25%. The revolving credit agreement terminates July 25,
2000. The credit facility is collaterized by receivables, inventories, equipment
and certain real property. Under the terms of the revolving credit agreement,
the Company is required to maintain certain financial ratios and other financial
conditions. The agreement also prohibits the Company from incurring certain
additional indebtedness, limits certain investments, advances or loans and
restricts substantial asset sales and capital expenditures. The terms of the
Company's bank credit facility also prohibits the payment of dividends except
with the lender's consent. The Company had $5,158,000 available for future
borrowings at February 28, 1998.
The Company also has a short term credit line with a European financial
institution utilized by Roberts Holland which permits borrowings of up to
$2,500,000. The borrowings are collateralized by accounts receivable, inventory,
machinery and equipment and a standby letter of credit from the Company's
domestic financial institution. During February 1998 financing activities
provided $17,431,000 principally from borrowing under the instruments previously
described. The Company believes that its existing cash balances, cash flow from
operations and borrowings available to it under the facility will be sufficient
to fund its working capital needs and other capital requirements for the
foreseeable future.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that advanced information processing is essential to
maintaining its competitive position. The Company participates in the electronic
data interchange program maintained by many of its larger customers, including
Home Depot, Lowe's, HomeBase and Hechinger/Builders Square. The Company has
upgraded its domestic management information systems during fiscal 1998, to
ensure proper processing of transactions relating to the year 2000 and beyond.
The Company continues to evaluate appropriate courses of corrective actions,
including replacement of certain systems at its foreign locations. The Company
does not expect the costs associated with ensuring year 2000 compliance to have
a material effect on its financial position or results of operations. All costs
for corrective actions associated with year 2000 compliance will be funded with
cash flow generated from operations and expensed as incurred. Although the
Company believes that the information systems of its major customers and vendors
(insofar as they relate to the Company's business) comply with year 2000
requirements, there can be no assurance that the year 2000 issue will not affect
the information systems of such customers and vendors as they relate to the
Company's business, or that any such impact on such customers' and vendors'
information systems would not have a material adverse effect on the Company's
business, financial condition or results of operations.
13
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") was issued in
June 1997. This statement is effective for the Company's fiscal year ending
February 28, 1999. This statement addresses the reporting and displaying of
comprehensive income and its components. Earnings per share will only be
reported for net income and not for comprehensive income. Adoption of SFAS No.
130 is not expected to have a material effect on the Company's financial
statement disclosures.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") was issued in June 1997. This statement is
effective for the Company's fiscal year ending February 28, 1999. This statement
changes the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports. Adoption of SFAS No.
131 is not expected to have a material effect on the Company's financial
statement disclosures.
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 similarly anticipatory expressions, are generally
forward-looking and are made only as of the date of this Report. Readers of this
Report are cautioned not to place undue reliance on such forward-looking
statements, as they are 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 those relating to the
Company's dependence upon certain key personnel, the Company's ability to manage
its growth, the Company's ability to successfully integrate the operations of
Roberts Consolidated and Roberts Holland, and the risks of economic and market
factors affecting the Company or its customers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
The response to this item is submitted in a separate section of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None required to be reported.
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 17, 1998.
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 17,
1998.
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 17, 1998.
14
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 17, 1998.
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) A Form 8-K/A was filed on December 31, 1997 including (under
Item 7 of Form 8-K) financial statements required in
connection with the Company's acquisition of Roberts
Consolidated Industries, Inc. A list of the financial
statements included in the Form 8-K/A was included in the
Company's Quarterly Report on Form 10-Q filed on January 14,
1998 and is incorporated herein by reference.
(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*
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 and 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**
15
10.2.7 Industrial Lease, dated August 1, 1996, by and between
JMB/Pennsylvania Advisors - IV, L.P., and the Company**
10.3.1 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.*****
10.3.4 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.+
21 Subsidiaries of the Company+
27 Financial Data Schedule+
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).****
99.3 Escrow Agreement dated October 21, 1997 among the Company, RCI
Holdings, Inc., and IBJ Schroeder.****
- ----------
+ Filed herewith.
* 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.
(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.
16
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 28, 1998.
Q.E.P. CO., INC.
By: /S/ LEWIS GOULD
----------------------
Lewis Gould
President
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 President, Chief Executive Officer May 28, 1998
- ------------------------------------ and Director (Principal Executive Officer)
Lewis Gould
/S/ MARC APPLEBAUM Senior Vice President and Chief Financial May 28, 1998
- ------------------------------------ Officer (Principal Financial and Accounting
Marc Applebaum Officer
/S/ MICHAEL ACTIS-GRANDE III Director May 28, 1998
- ------------------------------------
Michael Actis-Grande III
/S/ DOUGLAS A. CUMMINS Director May 28, 1998
- ------------------------------------
Douglas A. Cummins
/S/ SIDNEY DWORKIN Director May 28, 1998
- ------------------------------------
Sidney Dworkin
/S/ MERVYN FOGEL Director May 28, 1998
- ------------------------------------
Mervyn Fogel
/S/ WILLIAM P. KILLIAN Director May 28, 1998
- ------------------------------------
William P. Killian
/S/ RICHARD W. McEWEN Director May 28, 1998
- ------------------------------------
Richard W. McEwen
/S/ EDWARD F. RONAN, JR. Director May 28, 1998
- ------------------------------------
Edward F. Ronan, Jr.
/S/ NORMAN R. SNESIL Director May 28, 1998
- ------------------------------------
Norman R. Snesil
/S/ EMIL VOGEL Director May 28, 1998
- ------------------------------------
Emil Vogel
17
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 Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-21
Schedule II - Valuation and Qualifying Accounts F-22
F-1
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Q.E.P. Co., Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Q.E.P. Co., Inc.
and Subsidiaries (the "Company") as of February 28, 1998 and February 28, 1997,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended February 28, 1998.
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 generally accepted auditing
standards. 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, 1998 and February 28, 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended February 28, 1998, in conformity
with generally accepted accounting principles.
We have also audited Schedule II of QEP Co. Inc. and Subsidiaries for each of
the three years in the period ended February 28, 1998. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
Grant Thornton LLP
Ft. Lauderdale, Florida
April 10, 1998
F-2
Q.E.P. CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, FEBRUARY 28,
ASSETS 1997 1998
---------------- ----------------
CURRENT ASSETS
Cash and cash equivalents $ 4,901,131 $ 239,984
Accounts receivable, less allowance for doubtful accounts of
$61,100 and $480,000 as of February 28, 1997 and 1998 5,507,809 12,791,483
Notes receivable 34,506 688,272
Inventories 4,696,400 11,487,463
Prepaid expenses 391,072 1,365,027
Deferred income taxes --- 1,029,038
------------- -------------
Total current assets 15,530,918 27,601,267
PROPERTY AND EQUIPMENT, net 415,064 2,696,386
DEFERRED INCOME TAXES 248,000 1,125,845
INTANGIBLE ASSETS, net 78,866 8,033,978
NOTES RECEIVABLE 80,842 2,567,271
OTHER ASSETS 80,297 1,001,141
------------- -------------
TOTAL ASSETS $ 16,433,987 $ 43,025,888
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit and short term debt $ --- $ 4,246,452
Current maturities of long term debt 43,968 1,142,319
Accounts payable 1,153,983 4,902,485
Accrued liabilities 1,638,066 2,958,717
Deferred income taxes --- 139,078
------------- -------------
Total current liabilities 2,836,017 13,389,051
NOTES PAYABLE 144,893 6,788,219
SUBORDINATED LONG TERM DEBT --- 6,611,098
DEFERRED INCOME TAXES --- 604,445
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, 1997 and 1998 336,660 336,660
Common stock; 10,000,000 shares authorized,
$.001 par value; 2,654,894 shares issued and
outstanding at February 28, 1997 and 1998 2,655 2,655
Additional paid-in capital 8,433,719 8,746,876
Retained earnings 4,737,943 6,736,712
Cost of stock held in treasury (57,900) (57,900)
Cumulative translation adjustment --- (131,928)
------------- -------------
13,453,077 15,633,075
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,433,987 $ 43,025,888
============= =============
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 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
Net sales $25,271,715 $33,140,273 $53,691,186
Cost of goods sold 15,976,971 20,118,824 35,954,506
---------- ----------- -----------
Gross profit 9,294,744 13,021,449 17,736,680
Costs and expenses
Shipping 1,745,745 2,440,535 4,020,376
General and administrative 3,105,861 4,048,358 5,206,392
Selling and marketing 2,511,898 3,568,908 4,842,637
Foreign exchange losses, net 472 11,080 2,442
---------- ----------- -----------
7,363,976 10,068,881 14,071,847
---------- ----------- -----------
Operating income 1,930,768 2,952,568 3,664,833
Interest income 40,438 129,393 193,889
Interest expense (235,003) (136,643) (567,022)
---------- ----------- -----------
Income before provision
for income taxes 1,736,203 2,945,318 3,291,700
Provision for income taxes 668,452 1,142,577 1,282,053
---------- ----------- -----------
Net income $ 1,067,751 $ 1,802,741 $ 2,009,647
========== =========== ===========
Basic and diluted earnings per
share $.70 $.89 $.75
==== ==== ===
Weighted average number of shares
outstanding 1,506,000 2,011,521 2,677,184
========= =========== ===========
Pro forma net income per common
share $.65
====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
Q.E.P. CO. INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
--------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -----------
Balance at March 1, 1995 568,047 $ 568,047 200 $ 12,037 $ 20,225
Redemption of preferred stock (65,000) (65,000)
Stock split - 7,575.76 for 1 and
change in par value 1,514,952 (10,522) 10,522
Dividends
Purchase of treasury stock (15,152) (15) 15
Net income
------- ------- --------- ------ =========
Balance at February 29, 1996 503,047 503,047 1,500,000 1,500 30,762
Conversion of preferred stock
to common stock (166,387) (166,387) 4,894 5 166,382
Proceeds from initial public offering 1,150,000 1,150 8,236,575
Dividends
Net income
------- ------- --------- ------ ---------
Balance at February 28, 1997 336,660 336,660 2,654,894 2,655 8,433,719
Issuance of warrants 206,000
Employee stock options 107,157
Dividends
Cumulative effect of foreign translation
Net income
------- ------- --------- ------ =========
Balance at February 28, 1998 336,660 $336,660 2,654,894 $2,655 $8,746,876
======= ======= ========= ===== =========
RETAINED TRANSLATION TREASURY
EARNINGS ADJUSTMENT STOCK
-------- ---------- --------
Balance at March 1, 1995 $ 1,897,429
Redemption of preferred stock
Stock split - 7,575.76 for 1 and
change in par value
Dividends (17,264)
Purchase of treasury stock $ (57,900)
Net income 1,067,751
----------- ------------
Balance at February 29, 1996 2,947,916 (57,900)
Conversion of preferred stock
to common stock
Proceeds from initial public offering
Dividends (12,714)
Net income 1,802,741
----------- ------------
Balance at February 28, 1997 4,737,943 (57,900)
Issuance of warrants
Employee stock options
Dividends (10,878)
Cumulative effect of foreign translation $(131,928)
Net income 2,009,647
----------- -------- ------------
Balance at February 28, 1998 $6,736,712 $(131,928) $ (57,900)
=========== ======== ============
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 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 1,067,751 $ 1,802,741 $ 2,009,647
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 85,131 77,228 356,534
Amortization of fair market value in
excess of cost of business acquired (30,000) (30,000) 78,030
Amortization of discount on long term debt --- --- 96,098
Deferred income taxes 20,000 (164,000) 564,000
Gain on sale of property (20,000)
Stock option compensation --- --- 107,157
Changes in assets and liabilities:
Accounts receivable (1,223,019) (1,836,507) (1,558,897)
Notes receivable --- --- 109,805
Inventories (434,520) (1,557,719) 320,456
Prepaid expenses (228,744) (75,135) (841,529)
Other assets 11,673 29,016 152,311
Accounts payable and accrued liabilities (347,220) 1,149,519 (1,599,039)
------------ ------------ -----------
Net cash used in operating activities (1,078,948) (604,857) (225,427)
------------ ------------ -----------
Cash flows from investing activities:
Capital expenditures (45,671) (214,165) (771,914)
Acquisitions, net of cash acquired --- --- (20,982,692)
Sale of property --- --- 20,000
------------ ------------ -----------
Net cash used in investing activities (45,671) (214,165) (21,734,606)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from initial public offering --- 8,237,725 ---
Redemption of preferred stock (65,000) --- ---
Borrowings under lines of credit 1,051,496 5,727,298
Repayments under lines of credit --- (2,447,887) (2,411,139)
Borrowings of long term debt 8,885 32,664 14,515,000
Repayments of long term debt --- --- (389,467)
Cash overdraft 268,773 (268,773) ---
Dividends (17,264) (12,714) (10,878)
Purchase of treasury stock (57,900) --- ---
------------ ------------ -----------
Net cash provided by financing activities 1,188,990 5,541,015 17,430,814
------------ ------------ -----------
Translation adjustment --- --- (131,928)
NET INCREASE (DECREASE) IN CASH 64,371 4,721,993 (4,661,147)
Cash and cash equivalents at beginning of year 114,767 179,138 4,901,131
------------ ------------ -----------
Cash and cash equivalents at end of year $ 179,138 $ 4,901,131 $ 239,984
============ ============ ============
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, including both the do-it-yourself and professional trades. Under brand
names Q.E.P., Roberts, O'Tool, Marion Tool and Andrews Tools, Q.E.P. markets
approximately 4,000 specialty tools and related products used primarily for the
preparation and installation of ceramic tile, carpet, marble, masonry, drywall
and paint. The Company sells its products to large home improvement retail
centers, as well as traditional distribution outlets in 50 states and more than
30 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 intercompany accounts and transactions.
2. INITIAL PUBLIC OFFERING
On September 17, 1996, the Company completed its initial public
offering of 1,000,000 shares of its common stock, par value $.001 per
share ("Common Stock"), at an initial offering price of $8.50 per share
and 120,000 warrants to purchase Common Stock at an exercise price of
$10.20 per share with an offering price of $.001 per warrant (the
"Offering"). On November 6, 1996, the underwriters exercised their
overallotment rights and purchased an additional 150,000 shares of
Common Stock of the Company at a price of $8.50 per share. The net
proceeds from the Offering and the exercise of the overallotment option
were approximately $8,238,000.
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 average 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.
F-7
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are the estimated lives of the Company's property and
equipment:
Machinery and warehouse equipment 3 to 15 years
Furniture and equipment 3 to 10 years
Capital leases 3 to 5 years
Building 30 to 33 years
Leasehold improvements 5 to 15 years
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 including goodwill which represents costs in excess
of net assets of businesses acquired and organizational expenses are
recorded and amortized over periods ranging from five to thirty five
years using the straight-line method. The Company periodically
evaluates the carrying amount of goodwill to recognize and measure the
possible impairment of these assets. Based on the recoverability from
cash flow methods (which includes evaluating the probability that
estimated undiscounted cash flows from related operations will be less
than the carrying amount of goodwill and other long lived assets), the
Company believes there is no impairment to goodwill.
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 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
F-8
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employee stock option is less than the market price of the underlying
stock at the date of grant.
10. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128-Earnings Per Share ("FAS 128") which requires the dual presentation
of basic and diluted earnings per share for the periods ending after
December 15, 1997. 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 by the weighted average number of shares of
common stock, common stock equivalents and other potentially dilutive
securities outstanding during each period. In accordance with the
provisions of FAS 128, the Company has retroactively restated earnings
per share.
A reconciliation between basic and diluted earnings per share is as
follows:
YEAR ENDED FEBRUARY 28,
-------------------------------------
1996 1997 1998
---- ---- ----
Net Income $1,068,000 $1,802,741 $2,009,647
Less: Preferred stock dividends 17,264 12,714 10,878
--------- --------- ---------
Net income available to common stockholders $1,050,736 $1,790,027 $1,998,769
========= ========= =========
Basic EPS
Basic common shares 1,506,000 2,006,078 2,654,894
========= ========= =========
Basic EPS $.70 $.89 $.75
==== ==== ====
Diluted EPS
Basic common shares 1,506,000 2,006,078 2,654,894
Plus impact of stock options -- 5,443 22,290
--------- --------- ---------
Diluted common shares 1,506,000 2,011,521 2,677,184
========= ========= =========
Diluted EPS $.70 $.89 $.75
==== ==== ====
11. POST EMPLOYMENT BENEFITS
The Company has a policy which provides service benefits to its
salaried employees. The Company records a liability for postemployment
benefits in accordance with Statement of Financial Accounting Standards
(FAS No. 112, "Employers Accounting for Postemployment Benefits").
Since the Company cannot reasonably estimate postemployment 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.
F-9
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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.
13. FOREIGN CURRENCIES
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.
14. REVENUE RECOGNITION
Sales are recognized when merchandise is shipped and such revenue is
recorded net of estimated sales returns, discounts and allowances.
15. 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.
16. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make 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.
17. RECLASSIFICATIONS
Certain amounts in 1997 have been reclassified to conform with the 1998
presentation.
F-10
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - ACQUISITIONS
On October 21, 1997, pursuant to a stock purchase agreement dated as of the same
date, the Company acquired all of the issued and outstanding stock of Roberts
Consolidated Industries, Inc. ("Roberts"). The purchase price was $12,350,000 in
cash, the issuance to the Seller and its Designees of 8% Subordinated Debentures
due 2001, in an aggregate amount of $7,500,000 and the issuance to the Seller
and its Designees of warrants to purchase 200,000 shares of Common Stock of the
Company at a purchase price of $10 per share. The cash portion of the purchase
price was funded in part through a new term loan and the Company's existing
revolving credit facilities.
Effective December 31, 1997, the Company acquired all of the issued and
outstanding shares of Roberts Holland B.V. together with all licenses and
intellectual property. The purchase price of this transaction was approximately
$1,563,000 and the assumption of approximately $1,500,000 in debt.
These transactions have been accounted for as purchases and accordingly the
operating results since the date of acquisition have been included in the
accompanying financial statements. The purchase price was allocated based on the
estimated fair values of assets acquired and liabilities assumed. The excess of
the aggregate purchase price over the fair market value of net assets acquired
of approximately $8,034,000 is being amortized on a straight-line basis over 35
years. Accumulated amortization at February 28, 1998 was approximately $108,000.
The company is still gathering certain information required to complete the
allocation of the purchase price of the acquisitions. Further adjustments may
arise as a result of the finalization of the ongoing study.
The following unaudited pro forma consolidation shows the results of operations
assuming the above purchases occurred on March 1, 1996. The unaudited pro forma
results for the years ended February 28, 1997 and 1998, are not necessarily
indicative of what actually would have occurred if the acquisition had been in
effect for the entire period presented. In addition, they are not intended to be
a projection of future results.
1997 1998
---- ----
Net Sales $ 91,725,569 $ 92,079,532
Net Income $ 2,147,907 $ 1,297,186
Earnings per share $ 1.06 $ .48
NOTE D - 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. 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 is payable through a reduction in purchase price of goods
sold to the Company under a supply agreement. The Company estimates the note
will be repaid in five years.
NOTE E - INVENTORIES
Inventories consisted of the following:
FEBRUARY 28, FEBRUARY 28,
1997 1998
------------ ------------
Raw materials and work-in-progress $ 580,767 $ 3,896,608
Finished goods 4,115,633 7,590,855
--------- ----------
$4,696,400 $11,487,463
========= ==========
F-11
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
FEBRUARY 28, FEBRUARY 28,
1997 1998
------------ ------------
Land $ 7,509 $ 7,509
Machinery and warehouse equipment 406,448 1,417,384
Office furniture and equipment 248,752 1,438,098
Building and leasehold improvements 205,305 528,578
----------- ----------
868,014 3,391,569
Less accumulated depreciation and amortization (452,950) (695,183)
----------- ----------
$ 415,064 $ 2,696,386
=========== ==========
NOTE G - DEBT
The Company has a revolving credit and term loan facility with one
financial institution. The revolving credit facility permits borrowings of
up to $10,000,000 against a fixed percentage of eligible accounts
receivable and inventory, as defined. Interest is payable at LIBOR plus
1.25% (6.9% at February 28, 1998). The revolving credit agreement
terminates July 25, 2000. The credit facility is collateralized by
receivables, inventories, equipment and certain real property. Under the
terms of the Agreement, the Company is required to maintain certain
financial ratios and other financial conditions. The Agreement also
prohibits the Company from incurring certain additional indebtedness,
limits certain investments, advances or loans and restricts substantial
asset sales and capital expenditures. The terms of the Company's bank
credit facility prohibit the payment of dividends, except with the lender's
consent. Letters of credit are issued by the Company during the ordinary
course of business through major domestic banks as required by certain
vendor agreements under the revolving credit facility. The Company had
approximately $552,000 and $92,000 as of February 28, 1997 and 1998,
respectively, of outstanding letters of credit. During fiscal 1998 the
Company also issued a standby letter of credit in favor of a European
financial institution in the amount of $2,750,000 to collateralize the
Company's European facility. At February 28, 1998, the Company had
$5,158,000 available for future borrowing.
The 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 7.0% at February 28, 1998. The balance
of the term loan at February 28, 1998 was $7,714,285.
F-12
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the acquisition of Roberts, the Company issued
$7,500,000 of subordinated debentures. These debentures mature on April 1,
2001 and bear interest at 8%. These notes were recorded at their fair value
at the date of issuance in the amount of $6,515,000 and the discount will
be amortized over the life of the debenture. At February 28, 1998 the
amortized balance of this obligation was $6,611,098.
The Company also has a short term credit line with a European financial
institution utilized by its European subsidiary which permits borrowings of
up to $2,500,000. At February 28, 1998, borrowings under this agreement
totaled $1,452,298. The unused portion of this line was $1,147,702 at
February 28, 1998. This credit line bears interest at 5.00%. The borrowings
are collateralized by accounts receivable, inventory, machinery and
equipment, and the standby letter of credit.
The Company's European subsidiary has also entered into a factoring
agreement with a financial institution whereby the Company is advanced a
percentage against the accounts receivable. This agreement terminates on
November 30, 1998. At February 28, 1998, the balance is $708,154.
Interest paid for all debt was approximately, $218,000, $137,000 and
$267,000 in fiscal 1996, 1997 and 1998, respectively.
The aggregate maturities of all debt maturing during each of the next five
years as of February 28, is as follows:
1999 $ 1,142,319
2000 1,359,651
2001 1,142,856
2002 8,642,856
2003 and thereafter 3,142,856
-----------
Total $15,430,538
===========
Current $ 1,142,319
Long term 14,288,219
-----------
15,430,538
Unamortized Discount (888,902)
-----------
Total $14,541,636
===========
F-13
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
FEBRUARY 28, FEBRUARY 28,
1997 1998
------------ ------------
Accrued payroll and employee benefits $ 223,302 $ 633,846
Accrued liabilities 779,856 1,802,008
Accrued volume and advertising discount 408,804 222,419
Accrued interest - 300,444
Accrued income taxes 226,104 -
--------- ---------
$1,638,066 $2,958,717
========= =========
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company is periodically involved in litigation relating to claims arising
out of its operations in the normal course of business. The Company is not
currently engaged in any legal proceedings that are expected individually or in
the aggregate, to have a material adverse effect on the Company.
1. FUTURE MINIMUM OBLIGATIONS
The Company conducts its operations from various leased facilities.
Future minimum payments under noncancelable operating leases consist of
the following in fiscal years ending after February 28, 1998:
1999 $ 1,734,867
2000 1,722,514
2001 1,697,891
2002 1,034,796
2003 853,644
Thereafter $ 409,175
-----------
$ 7,452,887
===========
Total rent expense under noncancelable operating leases approximated
$404,000, $701,000 and $856,000, in fiscal 1996, 1997 and 1998,
respectively.
2. MARION TOOL COMPANY
During fiscal 1995, the Company acquired all of the outstanding common
stock of Marion Tool Company which manufactured specialty tools and
related castings. The Marion Tool Company had been identified as a
potentially responsible party ("PRP") pursuant to the Comprehensive
Environmental Response Compensation and Liability Act of 1980
("CERCLA"); for the cleanup of contamination resulting from past
disposal of hazardous wastes at certain sites to which Marion Tool
Company, among others, sent
F-14
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
wastes in the past. CERCLA required PRPs to pay for cleanup of sites
from which there has been a release or threatened release of hazardous
substances. In connection with the acquisition, the Company received
representation that Marion Tool Company had not violated any
environmental laws or regulations nor was there any situation that
required remedial action by Marion Tool Company under any environmental
laws or regulations. The Company received joint and several
indemnification by each of the shareholders prior to its acquisition
and 319,160 shares of the Company's Series A Preferred Stock have been
placed in escrow. The escrow agreement expires in August 2000. Based
upon, among other things, a review of the data available to the Company
regarding the site at which Marion Tool Company is alleged to have
deposited a portion of the waste located thereon, and a comparison of
the potential liability at this site to settlements reached by other
parties in similar cases, the Company believes that Marion Tool
Company's liability for this matter will not have a material adverse
effect on the Company's financial condition or results of operations.
During fiscal 1998 the Company sold certain assets of Marion Tool
Company and its subsidiary West Point Foundry to unrelated third
parties. The effects of these sales were not material to the financial
statements.
3. ROBERTS CONSOLIDATED INDUSTRIES
Subsequent to fiscal 1998 the Company received notification that
Roberts Consolidated Industries had been named a PRP for potentially
depositing hazardous material at a dumping site in Dayton, Ohio. The
plant that was sited has not been a Roberts facility since 1987. Based
on information currently available, the Company believes the outcome of
this action will not have a material adverse effect on the financial
condition of the Company. In addition, the Company has conducted
testing at its facility in Bramalea, Canada for potential leakage of
hazardous materials. The Company believes that certain chemicals have
contaminated both soil and groundwater. At the date of acquisition the
Company recorded a reserve for potential environmental liabilities
associated with the Roberts companies. The Company will continue to
assess its liability and begin the clean up process during fiscal 1999.
NOTE J - PENSION AND RETIREMENT PLANS
PROFIT SHARING AND 401(K) PLAN
The Company and its subsidiaries offers a 401(k) benefit plan (the "Plans")
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 plans. For the years ended February
28, 1996, February 28, 1997 and February 28, 1998, the Company contributed
$225,000, $155,000 and $105,500, respectively.
Subsequent to the acquisition of Roberts Consolidated Industries, Inc., the
Company terminated the Roberts Salaried Employees Defined Benefit Pension
Plan. As of February 28, 1998, the Company believes there are sufficient
assets for all projected liabilities associated with the plan's
termination. The Company has recorded an asset in excess of projected
benefit of approximately $700,000. During fiscal 1999, the Company will
have an actuarial valuation prepared which may adjust this amount. There is
no pension expense for the year ended February 28, 1998 associated with the
defined benefit pension plans.
F-15
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - INCOME TAXES
The components of the provision for income taxes are as follows:
YEAR ENDED FEBRUARY 28,
---------------------------------------------------------------
1996 1997 1998
---- ---- ----
Current:
Federal $ 558,118 $ 1,120,682 $ 608,053
State 90,334 185,895 94,000
Foreign --- --- 16,000
----------- ----------- -----------
648,452 1,306,577 718,053
----------- ----------- -----------
Deferred:
Federal 15,500 (144,000) 525,000
State 4,500 (20,000) 39,000
Foreign --- --- ---
----------- ----------- -----------
20,000 (164,000) 564,000
----------- ----------- -----------
Total income tax provision $ 668,452 $ 1,142,577 $ 1,282,053
=========== =========== ===========
The tax effects of temporary differences which give rise to deferred tax assets
are as follows:
FEBRUARY 28, FEBRUARY 28,
1997 1998
------------ ------------
Provision for doubtful accounts $ 22,716 $ 159,000
Accrued expenses 206,240 375,000
Fixed assets 23,385 (730,000)
Inventory (4,341) 77,000
Net operating loss and tax credit carryforwards 137,000 1,667,000
----------- -----------
385,000 1,548,000
Less: Valuation allowance (137,000) (137,000)
----------- ------------
Net deferred tax asset $ 248,000 $ 1,411,000
=========== ===========
The Company has approximately $4,400,000 in net operating loss carryforwards
which expire in the years 2011 through 2018. Both Roberts, Q.E.P. and Marion
have net operating loss carryforwards of $4,044,000 and $356,000, respectively,
which are subject to separate IRC Section 382 and SRLY limitations. The Section
382 limitation limits the Company's utilization of their net operating losses to
an annual amount after an ownership change. The SRLY limitations permit an
offset to the current consolidated taxable income only to the extent of taxable
income attributed to the member with the SRLY loss. Since the potential
utilization of Marion's net operating loss is uncertain, a valuation allowance
has been established to reduce the associated deferred tax asset to zero.
F-16
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
----------------------------------------------------------------------------
1996 1997 1998
---- ---- ----
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
Provision for federal income taxes
at the statutory rate $ 590,309 34.0% $ 1,001,597 34.0% $ 1,119,000 34.0%
State and local income taxes -
net of federal income tax benefit 59,620 3.4 122,691 4.2 88,000 2.7
Other 18,523 1.1 18,289 .6 75,053 2.2
---------- ----- ------------ ------ ------------ ----
Actual provision $ 668,452 38.5% $ 1,142,577 38.8% $ 1,282,053 38.9%
========== ===== ============ ====== ============ ====
Cash paid for income taxes was $897,364, $998,664 and $1,541,906 in fiscal 1996,
1997 and 1998 respectively.
NOTE L - 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 two customers.
One customer representing 51%, 50% and 37% and the other customer 10%,
11% and 6% of sales in fiscal 1996, 1997 and 1998, respectively. These
same two customers represented 37% and 10% and 22% and 4% of accounts
receivable at February 28, 1997 and 1998, respectively. 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, 1998.
2. SIGNIFICANT VENDOR INFORMATION
The Company purchased 19% and 14%, 10% and 9% for the years ended
February 29, 1996 and February 28, 1997, respectively, of total
purchases through two vendors. There were no significant purchases for
any one vendor for the year ended February 28, 1998.
NOTE M - SHAREHOLDERS' EQUITY - PREFERRED STOCK
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, shall be 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
F-17
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, there were
319,160 shares of Series A Preferred Stock issued and outstanding. There
were $13,653, $12,103 and $10,878, dividends declared and paid during the
fiscal years 1996, 1997 and 1998, respectively.
SERIES B
1,000,000 of the Company's 2,500,000 authorized shares of preferred stock,
$1 par value per share, shall be 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 noncumulative 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. In 1996, the Company bought back 65,000 shares at
a price of $1.00 per share. In fiscal 1997, the remaining preferred stock
were converted to 1,765 shares of common stock. There were $3,000 $-0-, and
$-0- of dividends declared and paid in fiscal years 1996, 1997 and 1998,
respectively.
SERIES C
1,000,000 of the Company's 2,500,000 authorized shares of preferred stock,
$1 par value per share, shall be 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 1997 and 1998, dividends of
approximately $1,200 and $1,800, respectively, in aggregate at $.035 per
share were in arrears. In fiscal year 1997 and 1998, dividends of
approximately $600 were declared.
TREASURY STOCK
Total common shares purchased in fiscal year 1996 and held in treasury were
15,152 shares for an aggregate cost $57,900.
F-18
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - 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. For the
year ended February 28, 1998, the Company granted 104,300 stock options
with an exercise price less than the fair market value on the date of the
grant. The Company charged $107,000 to compensation expense for these
options. Option terms, vesting and exercise periods vary, except that the
term of an option may not exceed five 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 in fiscal 1997
consistent with the provisions of SFAS No. 123, the Company's diluted net
income and earnings per share for the year ended February 28, 1997 and 1998
would have been as follows:
(in thousands, except per share data)
1997 1998
---- ----
Net income
As reported $ 1,803 $ 2,010
Pro forma 1,501 1,954
Net income per share
As reported $ 0.89 $ 0.75
Pro forma $ 0.74 $ 0.73
The weighted average fair value at date of grant for options granted during
1997 and 1998 was $1.94 and $2.95 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.
1997 1998
---- ----
Expected stock price volatility 23.9% 35.4%
Expected lives of options
Directors and officers 3 years 3 years
Employees 3 years 3 years
Risk-free interest rate 6.3% 5.9%
Expected dividend yield 0% 0%
F-19
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
Options outstanding at March 1, 1996 0 --
Exercised 0
Granted 175,550 $7.38
Cancelled or forfeited (600) 7.23
=======
Options outstanding at February 28, 1997 174,950
Exercised 0
Granted 119,200 7.27
Cancelled or forfeited (18,550) 7.10
-------
Options outstanding at February 28, 1998 275,600 7.35
=======
Options currently exercisable 208,700 7.17
=======
The following table summarizes information about stock options outstanding
as of February 28, 1998:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
6.375 - 8.625 275,600 3.7 7.35 208,700 $7.17
NOTE O - FUTURE EFFECTS OF RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130),
and Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). The Company
will implement SFAS 130 and SFAS 131 as required in fiscal 1999, which
requires the Company to report and display certain information related to
comprehensive income and operating segments, respectively. The effect of
adopting SFAS 130 and SFAS 131 is not expected to be material to the
Company's consolidated financial statements or notes to consolidated
financial statements.
F-20
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - NONCASH INVESTING AND FINANCING ACTIVITIES
On October 21, 1997, the Company purchased Roberts Consolidated Industries, Inc.
In connection with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $23,984,683
Cash paid 19,503,853
----------
Liabilities assumed $ 4,480,830
==========
Issuance of warrants to purchase common stock $ 206,000
==========
On December 31, 1997 the Company purchased Roberts Holland, B.V. In connection
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 4,895,799
Cash paid 1,647,000
-----------
Liabilities assumed $ 3,248,799
===========
F-21
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, 1996
Deducted from asset accounts
Allowance for doubtful accounts $44,800 $101,830 $92,130 $54,500
Year ended February 28, 1997
Deducted from asset accounts
Allowance for doubtful accounts 54,500 58,755 52,155 61,100
Year ended February 28, 1998
Deducted from asset accounts 61,100 34,458 (b) 442,645 58,293 480,000
Allowance for doubtful accounts
(a) Accounts written off as uncollectible, net of recoveries.
(b) Reserve associated with Roberts Consolidated Industries, Inc. at the date
of acquisition
F-22
EXHIBIT INDEX
EXHIBIT 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*
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 and 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 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.*****
10.3.4 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.+
21 Subsidiaries of the Company+
27 Financial Data Schedule+
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).****
99.3 Escrow Agreement dated October 21, 1997 among the Company, RCI
Holdings, Inc., and IBJ Schroeder.****
- ----------
+ Filed herewith.
* 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.