SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 2003
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 incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 1081 Holland Drive Boca Raton, Florida | 33487 | |
| (Address of principal executive offices) | (Zip code) | |
(561) 994-5550
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of July 14, 2003: 3,397,090 shares of common stock, par value $0.001 per share.
Q.E.P. CO., INC. AND SUBSIDIARIES
| Page | ||||||||
| PART I – FINANCIAL INFORMATION |
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| Item 1 – Financial Statements |
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| Condensed Consolidated Balance Sheets May 31, 2003 (Unaudited) and February 28, 2003 (Audited) |
3 | |||||||
| 4 | ||||||||
| 5 | ||||||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 | |||||||
| Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 | |||||||
| Item 3 – Qualitative and Quantitative Disclosures about Market Risk |
17 | |||||||
| 17 | ||||||||
| PART II – OTHER INFORMATION |
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| 19 | ||||||||
| 19 | ||||||||
| 21 | ||||||||
| 22 | ||||||||
| 23 | ||||||||
| Exhibit 99.1 Certification of Chief Executive Officer |
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| Exhibit 99.2 Certification of Chief Financial Officer |
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2
PART I. FINANCIAL INFORMATION
| ITEM I. | FINANCIAL STATEMENTS |
Q.E.P. CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 31, 2003 AND FEBRUARY 28, 2003
| May 31, 2003 |
February 28, 2003 |
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| (UNAUDITED) | (AUDITED) | |||||||
| ASSETS |
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| CURRENT ASSETS |
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| Cash and cash equivalents |
$ | 652,916 | $ | 304,453 | ||||
| Accounts receivable, less allowance for doubtful accounts of approximately $341,000 and $354,000 as of May 31, 2003 and February 28, 2003, respectively |
21,148,736 | 20,548,282 | ||||||
| Inventories |
26,543,819 | 28,386,525 | ||||||
| Prepaid expenses |
1,731,459 | 1,861,999 | ||||||
| Deferred income taxes |
598,876 | 598,876 | ||||||
| Total current assets |
50,675,806 | 51,700,135 | ||||||
| Property and equipment, net |
6,420,815 | 6,443,379 | ||||||
| Deferred income taxes |
1,067,194 | 1,216,913 | ||||||
| Intangible assets, net |
12,473,479 | 12,350,911 | ||||||
| Other assets |
984,686 | 814,020 | ||||||
| Total Assets |
$ | 71,621,980 | $ | 72,525,358 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES |
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| Lines of credit |
$ | 20,877,060 | $ | 20,339,721 | ||||
| Current maturities of long term debt |
2,637,619 | 2,818,148 | ||||||
| Acquisition notes payable |
729,605 | 839,326 | ||||||
| Accounts payable |
10,116,384 | 12,499,204 | ||||||
| Accrued liabilities |
3,657,419 | 3,393,251 | ||||||
| Total current liabilities |
38,018,087 | 39,889,650 | ||||||
| Notes payable |
6,432,489 | 6,582,680 | ||||||
| Acquisition notes payable |
1,077,705 | 1,171,795 | ||||||
| Deferred income taxes |
590,638 | 590,638 | ||||||
| Warrant put liability |
1,307,918 | 1,175,300 | ||||||
| Commitments and contingencies |
— | — | ||||||
| SHAREHOLDERS’ EQUITY |
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| Preferred stock, 2,500,000 shares authorized, $1.00 par value; 336,660 shares issued and outstanding at May 31, 2003 and February 28, 2003 |
336,660 | 336,660 | ||||||
| Common stock, 20,000,000 shares authorized, $.001 par value; 3,384,590 shares and 3,381,190 shares issued and outstanding at May 31, 2003 and February 28, 2003, respectively |
3,385 | 3,381 | ||||||
| Additional paid-in capital |
9,095,922 | 9,068,703 | ||||||
| Retained earnings |
16,244,564 | 15,838,522 | ||||||
| Cost of stock held in treasury |
(245,485 | ) | (436,170 | ) | ||||
| Accumulated other comprehensive income |
(1,239,903 | ) | (1,695,801 | ) | ||||
| $ | 24,195,143 | $ | 23,115,295 | |||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 71,621,980 | $ | 72,525,358 | ||||
The accompanying notes are an integral part of these statements
3
Q.E.P. CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MAY 31, 2003 AND 2002
(UNAUDITED)
| Three Months Ended |
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| May 31, 2003 |
May 31, 2002 |
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| Net Sales |
$ | 34,710,448 | $ | 31,190,454 | ||||
| Cost of goods sold |
22,759,925 | 20,792,353 | ||||||
| Gross profit |
11,950,523 | 10,398,101 | ||||||
| Costs and expenses |
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| Shipping |
3,282,273 | 2,663,262 | ||||||
| General and administrative |
2,957,188 | 2,617,075 | ||||||
| Selling and marketing |
3,627,034 | 3,288,841 | ||||||
| Other expense |
641,507 | 115,405 | ||||||
| 10,508,002 | 8,684,583 | |||||||
| Operating income |
1,442,521 | 1,713,518 | ||||||
| Interest income |
195 | 641 | ||||||
| Interest expense |
(725,527 | ) | (457,370 | ) | ||||
| Income before provision for income taxes and cumulative effect of change in accounting principle |
717,189 | 1,256,789 | ||||||
| Provision for income taxes |
(305,761 | ) | (543,021 | ) | ||||
| Net income before cumulative effect of change in accounting principle |
411,428 | 713,768 | ||||||
| Cumulative effect of change in accounting principle |
— | (3,047,788 | ) | |||||
| Net Income (loss) |
$ | 411,428 | $ | (2,334,020 | ) | |||
| Earnings (loss) per common share – basic and diluted: | ||||||||
| Earnings before cumulative effect of change in accounting principle |
$ | 0.12 | $ | 0.21 | ||||
| Cumulative effect of change in account principle |
— | (0.89 | ) | |||||
| Earnings (loss) per common share – basic and diluted |
$ | 0.12 | $ | (0.68 | ) | |||
The accompanying notes are an integral part of these statements.
4
Q.E.P. CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31, 2003 AND 2002
(UNAUDITED)
| Three Months Ended |
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| May 31, 2003 |
May 31, 2002 |
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| Cash flows from operating activities: |
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| Net income (loss) |
$ | 411,428 | $ | (2,334,020 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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| Cumulative effect of change in accounting principle |
— | 3,047,788 | ||||||
| Depreciation and amortization |
1,157,700 | 445,870 | ||||||
| Change in fair value of warrant put liability |
132,618 | 125,000 | ||||||
| Gain on sale of property and equipment |
(157,816 | ) | — | |||||
| Deferred income taxes |
149,719 | 121,443 | ||||||
| Bad debt expense |
48,403 | 112,158 | ||||||
| Changes in assets and liabilities: |
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| Accounts receivable |
(482,768 | ) | 602,405 | |||||
| Inventories |
1,914,224 | (1,264,466 | ) | |||||
| Prepaid expenses |
67,834 | 242,916 | ||||||
| Other assets |
(130,629 | ) | (99,290 | ) | ||||
| Accounts payable and accrued liabilities |
(2,344,109 | ) | 293,662 | |||||
| Net cash provided by operating activities |
766,604 | 1,293,466 | ||||||
| Cash flows from investing activities |
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| Proceeds from sale of property and equipment |
245,362 | — | ||||||
| Capital expenditures |
(312,338 | ) | (227,730 | ) | ||||
| Net cash used in investing activities |
(66,976 | ) | (227,730 | ) | ||||
| Cash flows from financing activities: |
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| Net borrowings under lines of credit |
537,339 | 312,954 | ||||||
| Borrowings of long term debt |
4,500,000 | — | ||||||
| Repayments of long term debt |
(5,389,909 | ) | (488,420 | ) | ||||
| Repayments of acquisition debt |
(132,401 | ) | (120,000 | ) | ||||
| Purchase of common treasury stock |
(21,000 | ) | — | |||||
| Proceeds from exercise of stock options |
13,707 | — | ||||||
| Dividends |
(5,387 | ) | (5,584 | ) | ||||
| Net cash used in financing activities |
(497,651 | ) | (301,050 | ) | ||||
| Cumulative currency translation adjustment |
146,486 | (280,829 | ) | |||||
| Net increase in cash |
348,463 | 483,857 | ||||||
| Cash and cash equivalents at beginning of period |
304,453 | 435,320 | ||||||
| Cash and cash equivalents at end of period |
$ | 652,916 | $ | 919,177 | ||||
| Supplemental disclosure of cash flow information |
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| Interest paid |
$ | 796,948 | $ | 434,754 | ||||
| Income taxes paid |
$ | 334,854 | $ | 215,750 | ||||
The accompanying notes are an integral part of these statements.
5
Q.E.P. CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying financial statements for the interim periods are unaudited and include the accounts of Q.E.P. Co., Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated. The interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report on Form 10-K for the year ended February 28, 2003, of Q.E.P. Co., Inc. (the “Company”) as filed with the Securities and Exchange Commission. The February 28, 2003 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three months ended May 31, 2003 are not necessarily indicative of the results for the full fiscal year ending February 29, 2004.
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 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation, Transition and Disclosure”, which permits the Company to account for stock option grants in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Under APB 25, compensation expense is recorded when the exercise price of the Company’s employee stock option is less than the market price of the underlying stock at the date of grant.
The Company continues to account for options issued under the intrinsic value method of APB 25. Had compensation cost been determined based on the fair value at the grant date for stock option awards consistent with the provisions of SFAS No. 123, the Company’s net income (loss) and diluted earnings (loss) per share for the three months ended May 31, 2003 and 2002 would have been as follows:
| First Quarter Ended May 31, |
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| 2003 |
2002 |
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| (In Thousands, Except Per Share Data) |
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| Net income (loss) |
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| As reported |
$ | 411 | $ | (2,334 | ) | ||
| Pro forma |
$ | 337 | $ | (2,358 | ) | ||
| Net income (loss) per share |
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| As reported |
$ | 0.12 | $ | (0.68 | ) | ||
| Pro forma |
$ | 0.10 | $ | (0.70 | ) | ||
6
Note 2. Inventories
Inventories are stated at the lower of standard cost, which approximates first-in, first-out, or market.
Inventories are comprised of the following:
| May 31, 2003 |
February 28, 2003 | |||||
| Raw materials and work-in process |
$ | 3,782,876 | $ | 3,881,804 | ||
| Finished goods |
22,760,943 | 24,504,721 | ||||
| $ | 26,543,819 | |||||