UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal quarter ended August 31, 2004
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 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 registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate 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 issuer’s classes of common stock, as of the latest practicable date.
3,456,800 SHARES ($.001 PAR VALUE)
AS OF OCTOBER 14, 2004
Q.E.P. CO., INC. AND SUBSIDIARIES
| Page | ||
| PART I - FINANCIAL INFORMATION |
||
| Item 1 - Financial Statements |
3 | |
| Condensed Consolidated Balance Sheets August 31, 2004 (Unaudited) and February 29, 2004* |
3 | |
| 4 | ||
| 5 | ||
| 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 |
22 | |
| Item 4 – Controls and Procedures |
22 | |
| PART II - OTHER INFORMATION |
||
| Item 1 - Legal Proceedings |
23 | |
| Item 4 – Submission of Matters to a Vote of Security Holders |
23 | |
| Item 5 – Other Information |
24 | |
| Item 6 - Exhibits |
24 | |
| 25 | ||
| 26 | ||
| * | Information derived from our audited financial statements on Form 10-K. |
2
Q.E.P. CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2004 AND FEBRUARY 29, 2004
| August 31, 2004 |
February 29, 2004 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS |
||||||||
| Cash and cash equivalents |
$ | 1,080,688 | $ | 956,608 | ||||
| Accounts receivable, less allowance for doubtful accounts of $438,000 and $643,000 at August 31, 2004 and February 29, 2004, respectively |
26,303,981 | 23,121,599 | ||||||
| Inventories |
32,614,026 | 28,854,980 | ||||||
| Prepaid expenses |
2,050,746 | 2,147,598 | ||||||
| Deferred income taxes |
382,167 | 382,167 | ||||||
| Total current assets |
62,431,608 | 55,462,952 | ||||||
| Property and equipment, net |
8,064,263 | 8,029,371 | ||||||
| Deferred income taxes |
921,297 | 1,112,381 | ||||||
| Goodwill |
12,275,311 | 11,400,335 | ||||||
| Other intangible assets, net |
2,151,343 | 2,247,711 | ||||||
| Other assets |
585,270 | 571,205 | ||||||
| TOTAL ASSETS |
$ | 86,429,092 | $ | 78,823,955 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES |
||||||||
| Lines of credit |
$ | 23,199,311 | $ | 19,233,115 | ||||
| Acquisition notes payable |
744,507 | 568,582 | ||||||
| Current maturities of long term debt |
2,849,093 | 2,751,683 | ||||||
| Accounts payable |
14,735,716 | 11,935,810 | ||||||
| Accrued liabilities |
5,900,761 | 7,221,143 | ||||||
| Total current liabilities |
47,429,388 | 41,710,333 | ||||||
| Notes payable |
5,188,412 | 6,152,134 | ||||||
| Acquisition notes payable |
1,112,667 | 805,765 | ||||||
| Deferred income taxes |
705,583 | 705,583 | ||||||
| Warrant put liability |
2,037,792 | 1,942,792 | ||||||
| TOTAL LIABILITIES |
56,473,842 | 51,316,607 | ||||||
| Commitments and Contingencies |
— | — | ||||||
| SHAREHOLDERS’ EQUITY |
||||||||
| Preferred stock, 2,500,000 shares authorized, $1.00 par value; 336,660 shares issued and outstanding at August 31, 2004 and February 29, 2004 |
336,660 | 336,660 | ||||||
| Common stock, 20,000,000 shares authorized, $.001 par value; 3,456,800 shares and 3,414,050 shares issued and outstanding at August 31, 2004 and February 29, 2004, respectively |
3,457 | 3,414 | ||||||
| Additional paid-in capital |
9,529,520 | 9,274,739 | ||||||
| Retained earnings |
21,689,758 | 19,316,727 | ||||||
| Cost of stock held in treasury |
(381,445 | ) | (381,445 | ) | ||||
| Accumulated other comprehensive income |
(1,222,700 | ) | (1,042,747 | ) | ||||
| 29,955,250 | 27,507,348 | |||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 86,429,092 | $ | 78,823,955 | ||||
The accompanying notes are an integral part of these statements
3
Q.E.P. CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS AND THREE MONTHS ENDED AUGUST 31, 2004 AND 2003
(UNAUDITED)
| Six Months Ended |
Three Months Ended |
|||||||||||||||
| August 31, 2004 |
August 31, 2003 |
August 31, 2004 |
August 31, 2003 |
|||||||||||||
| Net sales |
$ | 85,695,129 | $ | 69,199,518 | $ | 42,590,802 | $ | 34,489,070 | ||||||||
| Cost of goods sold |
56,764,803 | 45,278,369 | 28,272,627 | 22,518,444 | ||||||||||||
| Gross profit |
28,930,326 | 23,921,149 | 14,318,175 | 11,970,626 | ||||||||||||
| Costs and expenses |
||||||||||||||||
| Shipping |
8,697,028 | 6,303,419 | 4,288,044 | 3,021,146 | ||||||||||||
| General and administrative |
7,455,428 | 6,055,389 | 3,716,557 | 3,098,201 | ||||||||||||
| Selling and marketing |
8,201,238 | 7,260,338 | 4,016,590 | 3,633,304 | ||||||||||||
| Other expense |
129,244 | 905,795 | 38,678 | 264,288 | ||||||||||||
| 24,482,938 | 20,524,941 | 12,059,869 | 10,016,939 | |||||||||||||
| Operating income |
4,447,388 | 3,396,208 | 2,258,306 | 1,953,687 | ||||||||||||
| Interest income |
1,935 | 474 | 1,929 | 279 | ||||||||||||
| Interest expense |
(631,781 | ) | (1,056,267 | ) | (322,091 | ) | (330,740 | ) | ||||||||
| Income before provision for income taxes |
3,817,542 | 2,340,415 | 1,938,144 | 1,623,226 | ||||||||||||
| Provision for income taxes |
(1,439,521 | ) | (949,721 | ) | (722,289 | ) | (643,960 | ) | ||||||||
| Net income |
$ | 2,378,021 | $ | 1,390,694 | $ | 1,215,855 | $ | 979,266 | ||||||||
| Basic earnings per common share |
$ | 0.69 | $ | 0.41 | $ | 0.35 | $ | 0.29 | ||||||||
| Diluted earnings per common share |
$ | 0.65 | $ | 0.40 | $ | 0.33 | $ | 0.28 | ||||||||
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 SIX MONTHS ENDED AUGUST 31, 2004 AND 2003
(UNAUDITED)
| Six Months Ended |
||||||||
| August 31, 2004 |
August 31, 2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 2,378,021 | $ | 1,390,694 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||||
| Change in fair value of warrant put liability |
95,000 | 410,337 | ||||||
| Depreciation and amortization |
1,257,262 | 1,705,746 | ||||||
| Bad debt expense |
102,024 | 151,527 | ||||||
| Gain on sale of property and equipment |
— | (160,803 | ) | |||||
| Deferred income taxes |
191,084 | 299,438 | ||||||
| Changes in assets and liabilities, net of acquisitions: |
||||||||
| Accounts receivable |
(2,264,637 | ) | (378,150 | ) | ||||
| Inventories |
(3,200,168 | ) | 4,879,219 | |||||
| Prepaid expenses |
98,935 | 441,676 | ||||||
| Other assets |
(72,586 | ) | (157,272 | ) | ||||
| Accounts payable and accrued liabilities |
1,206,699 | (988,740 | ) | |||||
| Net cash (used in) provided by operating activities |
(208,366 | ) | 7,593,672 | |||||
| Cash flows from investing activities: |
||||||||
| Proceeds from sale of property and equipment |
— | 245,362 | ||||||
| Capital expenditures |
(463,270 | ) | (897,361 | ) | ||||
| Acquisitions, net of cash acquired |
(2,051,433 | ) | — | |||||
| Net cash used in investing activities |
(2,514,703 | ) | (651,999 | ) | ||||
| Cash flow from financing activities: |
||||||||
| Net borrowings (repayment) under lines of credit |
3,966,196 | (4,400,161 | ) | |||||
| Borrowings of long term debt |
750,540 | 4,921,403 | ||||||
| Repayments of long-term debt |
(1,450,304 | ) | (6,234,913 | ) | ||||
| Repayment of acquisition notes payable |
(315,966 | ) | (263,954 | ) | ||||
| Purchase of common treasury stock |
(61,500 | ) | (42,000 | ) | ||||
| Proceeds from exercise of stock options |
254,824 | 90,208 | ||||||
| Dividends |
(4,988 | ) | (5,386 | ) | ||||
| Net cash provided by (used in) financing activities |
3,138,802 | (5,934,803 | ) | |||||
| Cumulative currency translation adjustment |
(291,653 | ) | (148,057 | ) | ||||
| Net increase in cash |
124,080 | 858,813 | ||||||
| Cash and cash equivalents at beginning of period |
956,608 | 304,453 | ||||||
| Cash and cash equivalents at end of period |
$ | 1,080,688 | $ | 1,163,266 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Interest paid |
$ | 680,172 | $ | 1,243,011 | ||||
| Income taxes paid |
$ | 1,053,272 | $ | 769,448 | ||||
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. Interim Reporting
The accompanying financial statements for the interim periods are unaudited and include the accounts of Q.E.P. Co., Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated. The interim financial statements have been prepared in conformity with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and therefore do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, 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 have been included. These financial statements should be read in conjunction with the financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report on Form 10-K for the year ended February 29, 2004, of the Company as filed with the SEC. The February 29, 2004 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 six months ended August 31, 2004 are not necessarily indicative of the results for the full fiscal year ending February 28, 200