-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E1IjUdFkXD9ceLK9HuZ347rQuOGjoF5aOpxK7/OKqcZBcLRo3G0IGnsvNff8b+YZ kp5zv/sj/fDEztSo9aq0kg== 0000950170-98-001123.txt : 19980529 0000950170-98-001123.hdr.sgml : 19980529 ACCESSION NUMBER: 0000950170-98-001123 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980528 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QEP CO INC CENTRAL INDEX KEY: 0001017815 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 132983807 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21161 FILM NUMBER: 98633322 BUSINESS ADDRESS: STREET 1: 1081 HOLLAND DRIVE CITY: BOCA RATON STATE: FL ZIP: 33487 BUSINESS PHONE: 5619945550 MAIL ADDRESS: STREET 1: 1081 HOLLAND DRIVE CITY: BOCA RATON STATE: FL ZIP: 33487 10-K 1 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 2 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. 3 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 4 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 6 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. 7 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. EX-10.3.4 2 - -------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT EFFECTIVE JANUARY 1, 1998 BETWEEN Q.E.P. HOLDING B.V. AND ROBERTS BEHEER B.V. - -------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") effective January 1, 1998, is between Q.E.P. HOLDING B.V. (the "Company") and ROBERTS BEHEER B.V. ("Roberts"). WHEREAS, Roberts is engaged, through Roberts Holland B.V. and its subsidiaries (the "Holland Companies"), in the business of manufacturing and distributing flooring tools and related products under the Roberts trade name in select European countries (the "Holland Business"); and WHEREAS, Roberts is the owner of 1,000 ordinary shares (the "Shares") of Roberts Holland B.V. ("Holland"), which Shares constitute all of the outstanding capital stock of Holland; and WHEREAS, Roberts desires to sell, transfer and deliver to the Company, and the Company desires to purchase and accept from Roberts, all of the Shares on the terms and subject to the conditions set forth herein. NOW THEREFORE in consideration of the premises and the representations, warranted, covenants and agreements herein contained and intended to be legally bound hereby, the Company and Roberts hereby agree as follows: ARTICLE I DEFINITIONS AND TERMS SECTION 1.1. SPECIFIC DEFINITIONS. For purposes of this Agreement, the following terms shall have the meaning set forth below: "Affiliate" shall mean with respect to any specified Person, any other Person directly or indirectly controlling, controlled by or under common control with such specified Person. "Agreed Rate" shall mean the rate offered by ABN AMRO Bank N.V. in the Netherlands on thirty (30) day dollar deposits at the Closing Date and thereafter at thirty (30) day intervals. 2 "Agreement" shall mean this Stock Purchase Agreement, together with all exhibits and schedules hereto, as the same may be amended or supplemented from time to time in accordance with the terms hereof. "Applicable Laws" shall mean with respect to any Person, all statutes, laws, ordinances, rules, orders and regulations of any Governmental Authority applicable to such Person and its business, properties and assets. "Business Day" shall mean a day other than a Saturday, Sunday or other day on which banks located in New York City, New York and in the Netherlands are authorized or required by law to close. "Capital Stock" shall mean common stock, ordinary shares, preferred stock, partnership interests, or other ownership interests entitling the holder thereof to vote with respect to matters involving the issuer thereof. "Closing" shall mean the closing of the transactions contemplated by this Agreement. "Confidentiality Agreement" shall mean, collectively, (i) the agreement, dated December 4, 1997, between the Company and Roberts, and (ii) the letter agreement dated November 25, 1997, between the Company and Holland. "Employee Arrangements" shall mean all employment and consulting agreements, and all bonus and other incentive compensation, deferred compensation, disability, severance, stock award, stock option, stock purchase, collective bargaining or workers' compensation agreements, plans, programs, policies and arrangements with respect to the employment or termination of employment of any employee, officer, director or other Person who is or was employed by any of the Holland Companies or primarily in the Holland Business. 3 "Employee Benefit Plans" shall mean all "employee benefit plans" which Holland or the Holland Companies maintain and in which any employee or former employee employed by the Holland Companies or primarily in the Holland Business participates. "Encumbrances" shall mean any and all mortgages, security interests, liens, claims, pledges, restrictions, leases, title exceptions, rights of others, charges or other encumbrances. "Environmental Law" shall mean any law, statute, ordinance, rule, regulation, order, judgment or decree as in effect as of the date of this Agreement relating to (i) the protection of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface or subsurface land) or (ii) the exposure of Persons (other than persons employed by the Holland Business or the Holland Companies) to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labelling, protection, release or disposal of, Hazardous Substances, but excluding any such law, statute, ordinance, rule, regulation, order, judgment or decree, including common law, (x) governing protection of worker health and safety or human health (other than exposure of Persons other than Persons employed by the Holland Business or the Holland Companies to Hazardous Substances), or (y) establishing the basis for a claim for product liability. "Equity" shall mean stockholders' equity of the Holland Companies calculated in accordance with GAAP. "Financial Statements" shall mean the audited financial statements of the Holland Companies, prepared on a consolidated basis, for the year ended December 31, 1996. "GAAP" shall mean generally accepted accounting principles in effect in the Netherlands. "Governmental Authority" shall mean any foreign, federal, state or local government, court, agency or commission or other governmental or regulatory body or authority. 4 "Guaranteed Equity" shall mean Equity as at December 31, 1997, of not less than $900,000 at an exchange rate of NLG 2 (two Netherlands guilders) = $1, calculated in accordance with GAAP applied on a consistent basis with the Financial Statements. "Holland Business" shall have the meaning set forth in the recitals to this Agreement. "Holland Companies" shall mean Holland and all of its direct and indirect Subsidiaries. "Knowledge" of Roberts or any Holland Company or any similar phrase means the actual knowledge of those management employees of Roberts or the Holland Companies identified in Section 1.1(a) of the Roberts Disclosure Schedule, after reasonable inquiry. "Legal Proceedings" shall mean any judicial, administrative or arbitral actions, claims, suits, proceedings (public or private), investigations or governmental proceedings. "Material Adverse Effect" shall mean, with respect to any Person, any change or effect that is materially adverse to the business of such Person and its Subsidiaries taken as a whole; provided, however, that Material Adverse Effect shall exclude any change or effect due to (i) general economic or industry-wide conditions, including, without limitation, devaluation, revaluation or decline in value of any foreign currency against the U.S. dollar, (ii) any continuation of an adverse trend disclosed to the Company on or prior to the date hereof, and (iii) any condition described in the Roberts Disclosure Schedule, following its acceptance by the Company. "Person" or "person" shall mean and includes any individual partnership, joint venture, corporation, association, joint stock company, trust, unincorporated organization or similar entity. "Roberts" shall have the meaning set forth in the recitals to this Agreement. "Shares" shall have the meaning set forth in the recitals to this Agreement. 5 "Subsidiary" shall mean, with respect to any Person, (i) each corporation, partnership, joint venture or other legal entity of which such Person owns, either directly or indirectly, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or similar governing body of such corporation, partnership, joint venture or other legal entity and (ii) each partnership in which such Person or another Subsidiary of such Person is the general partner or otherwise controls such partnership. "Tax" or "Taxes" shall mean all taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, fines, additions to tax or additional amounts imposed by any taxing authority and shall include any transferee liability in respect of Taxes. "Tax Returns" shall mean all reports, returns, declaration forms and statements filed or required to be filed with respect to Taxes. SECTION 1.2. TERMS DEFINED ELSEWHERE IN THE AGREEMENT. For purposes of this Agreement, the following terms have the meanings set forth in the sections indicated: TERM SECTION ---- ------- Agent......................................................... 2.2 Asserted Liability............................................ 5.5 Claim Notice.................................................. 5.5 Closing Date.................................................. 2.3 Closing Statement............................................. 2.6(a) 6 TERM SECTION ---- ------- Company Disclosure Schedule................................... 4.3 Company Indemnified Parties................................... 5.5 CPA Firm...................................................... 2.6(b) Environmental Claim........................................... 3.12(a) Final Amount.................................................. 2.6(c) Holland Companies Employees................................... 3.11(d) Holland Employee Arrangements................................. 3.11(b) Holland Employee Benefit Plans................................ 3.11(a) Holland Intellectual Property Rights.......................... 3.14(a) Holland Permits............................................... 3.10 Holland Securities............................................ 3.2(a) License Agreement............................................. 3.14(c) Losses........................................................ 5.5 Notice Period................................................. 5.5 Objection..................................................... 2.6(b) Purchase Price................................................ 2.2 Roberts Disclosure Schedule................................... 3.1(a) Roberts Indemnified Parties................................... 5.5 Supervisory Board............................................. 3.3 SECTION 1.3. OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof", "herein", and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. (c) The terms "dollars" and "$" shall mean United States dollars. 7 (d) As used in this Agreement, accounting terms which are specifically defined under GAAP and are not otherwise defined herein shall have the respective meanings given to them under GAAP. SECTION 1.4. REFERENCES TO TIME. All references in this Agreement to times of the day shall be to Netherlands time. ARTICLE II PURCHASE AND SALE OF THE SHARES SECTION 2.1. PURCHASE AND SALE OF THE SHARES. On the terms and subject to the conditions set forth herein, Roberts hereby sells and agrees to transfer and deliver to the Company, and the Company hereby purchases and agrees to accept transfer and delivery from Roberts of, the Shares. SECTION 2.2. PURCHASE PRICE. Upon the execution of this Agreement, the Company shall pay to Schut/van Os, in its capacity as notary and disbursement agent (the "Agent"), and shall instruct the Agent to pay Roberts by certified check or wire transfer of immediately available funds to bank account no. 50.26.77.759 held in the name of Roberts with ABN AMRO Bank N.V. at Sliedrecht, the Netherlands (Swift Code: ABNANL 2 R), the sum of $900,000 in respect of the Guaranteed Equity and the sum of $375,000 in respect of outstanding loans extended by Roberts to Holland (such sums, collectively, the "Purchase Price"). SECTION 2.3. CLOSING. The Closing shall take place at the offices of Schut/van Os Notarissen, Honthortstraat 3, Amsterdam, on January 20, 1998, or such other place or date as the parties hereto may agree, but no later than January 31, 1998. The date on which the Closing occurs is called the "Closing Date". SECTION 2.4. DELIVERIES BY THE PARTIES. At the Closing, the parties shall deliver to each other the certificates and other documents to be delivered pursuant to Sections 6.2 and 6.3, as the case may be, and shall execute the notarial deed of transfer of the Shares in the agreed form. 8 SECTION 2.5. EFFECTIVE DATE OF PURCHASE. The parties agree that the purchase of Holland shall be effective January 1, 1998. Therefore, the operation of the Holland Business shall be deemed to have been for the account and risk of the Company with effect from January 1, 1998. SECTION 2.6. ADJUSTMENT TO PURCHASE PRICE. (a) Within 90 Business Days following the Closing Date, the Company shall, at its expense, prepare, or cause to be prepared, and deliver to Roberts a statement (the "Closing Statement"), which shall set forth in reasonable detail the amount of Equity as at December 31, 1997. The Closing Statement shall be prepared in accordance with GAAP applied on a consistent basis with the Financial Statements. In the event the Company elects to omit the preparation of the Closing Statement and its submission to Roberts, such omission shall be deemed conclusive evidence that the Company accepts the Equity being equal to the Guaranteed Equity and the remainder of this Section 2.6 shall be void and of no effect. (b) Roberts shall have 20 Business Days to review the Closing Statement and to inform the Company in writing of its disagreement (the "Objection") with the Closing Statement, if any. If the Company does not receive Roberts' Objection within such 20 Business Day period, the amount of Equity set forth in the Closing Statement delivered pursuant to Section 2.6(a) shall be deemed to have been accepted by Roberts and shall become binding upon Roberts. If Roberts does deliver Roberts' Objection to the Company, the Company shall then have 20 Business Days to review and respond to Roberts' Objection. If the Company and Roberts are unable to resolve all of their disagreements with respect to the determination of Equity as at December 31, 1997, within ten Business Days following the completion of the Company's review of Roberts' Objection, they may refer, at the option of either party, their differences to an internationally recognized firm of independent registered accountants in the Netherlands selected jointly by the Company and Roberts, who 9 shall, acting as experts and not as arbitrators, determine only with respect to the differences so submitted, whether and to what extent, if any, the amount of Equity set forth in the Closing Statement requires adjustment. If Roberts and the Company are unable to so select the independent registered accountants within five Business Days of either party requesting such referral, either the Company or Roberts may thereafter request that the Chairman of the Netherlands Institute of Registered Accounts make such selection (the firm selected by agreement or by such Chairman is referred to as the "CPA Firm"). Roberts and the Company shall direct the CPA Firm to use its best efforts to render its determination within 30 Business Days. The CPA Firm's determination shall be conclusive and binding upon Roberts and the Company. The fees and disbursements of the CPA Firm shall be shared equally by Roberts and the Company. Roberts and the Company shall make readily available to the CPA Firm all relevant books and records relating to the Closing Statement and all other items reasonably requested by the CPA Firm. (c) If the sum of the amount of Equity as at December 31, 1997, determined in accordance with the procedures set forth in this Section 2.6 (the "Final Amount") and converted from Netherlands guilders into dollars at the same exchange rate as the exchange rate applicable to the Guaranteed Equity, is less than the amount of the Guaranteed Equity, Roberts shall, within ten Business Days following the determination of the Final Amount, pay to the Company a dollar amount in cash equal to such difference, with a maximum of $900,000. (d) The amount payable by Roberts to the Company under this Section 2.6 shall bear interest at the Agreed Rate as in effect from time to time, computed from the date of execution of this Agreement to the date of payment of such amount and shall be wire transferred to an account designated by the Company. 10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF ROBERTS Roberts hereby represents and warrants to the Company as of the date of this Agreement and the Closing Date as follows: SECTION 3.1. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. (a) Section 3.1 of the Disclosure Schedule delivered by Roberts to the Company in accordance with Section 5.1 (the "Roberts Disclosure Schedule") identifies each subsidiary of Holland as of the date hereof and its respective country or jurisdiction of incorporation or organization, as the case may be. Except as set forth in Section 3.1 of the Roberts Disclosure Schedule, Holland does not have any interest in any corporation, partnership, limited liability company, business trust or other business entity. Each of the Holland Companies is duly organized and validly existing under the laws of the jurisdiction of its incorporation or organization and has all requisite power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted. Roberts will provide as an Annex to Section 3.1 of the Roberts Disclosure Schedule an accurate and complete copy of the articles of association ("STATUTEN") of Holland, as currently in effect. (b) Each of the Holland Companies is duly qualified or licensed to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed would not have a Material Adverse Effect on the Holland Companies. SECTION 3.2. CAPITALIZATION OF HOLLAND AND ITS SUBSIDIARIES. (a) The authorized Capital Stock of Holland consists of 5,000 ordinary shares, of which, as of the date of this Agreement, 1,000 Shares were issued and outstanding. All of 11 the outstanding Shares have been validly issued and are fully paid and free of preemptive rights except as set forth in the articles of association of Holland. Except as disclosed in Section 3.2 of the Roberts Disclosure Schedule, between January 1, 1997 and the date hereof, no shares of Holland's Capital Stock have been issued. Except as set forth above, as of the date hereof and as of the Closing Date, there are outstanding (i) no shares of Capital Stock or other voting securities of Holland, (ii) no securities of the Holland Companies convertible into or exchangeable for shares of Capital Stock or voting securities of Holland, (iii) no options or other rights to acquire from the Holland Companies, and no obligations of the Holland Companies to issue, any Capital Stock, voting securities or securities convertible into or exchangeable for Capital Stock or voting securities of Holland and (iv) no equity equivalent interests or rights to acquire equity equivalent interests in the ownership or earnings of the Holland Companies or other similar rights (collectively "Holland Securities"). As of the date hereof, there are no outstanding obligations of the Holland Companies to repurchase, redeem or otherwise acquire any Holland Securities. There are no stockholder agreements, voting trusts or other agreements or understandings to which Holland is a party or by which it is bound relating to the voting or registration of any shares of Capital Stock of Holland. (b) All of the outstanding Capital Stock of Holland's subsidiaries is owned by Holland, directly or indirectly, free and clear of any Encumbrances or any other limitation or restriction (including any restriction on the right to vote or sell the same except as may be provided as a matter of law or under the organizational documents of Holland's subsidiaries). There are no securities of the Holland Companies convertible into or exchangeable for, no options or other rights to acquire from the Holland Companies and no other contract, understanding, arrangement or obligation (whether or not contingent) 12 providing for, the issuance or sale, directly or indirectly, of any Capital Stock or other ownership interests in or any other securities of any subsidiary of Holland. There are no outstanding contractual obligations of the Holland Companies to repurchase, redeem or otherwise acquire any outstanding shares of Capital Stock or other ownership interests in any subsidiary of Holland. (c) All of the Shares are owned by Roberts and constitute all of the outstanding Capital Stock of Holland. The Shares are owned by Roberts, free and clear of any Encumbrances. SECTION 3.3. AUTHORITY RELATIVE TO THIS AGREEMENT. Roberts and Holland have all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the supervisory board of Roberts (the "Supervisory Board") and have been approved by the works council of Holland. No other corporate proceedings on the part of Roberts or Holland are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Roberts and constitutes a valid, legal and binding agreement of Roberts enforceable against Roberts in accordance with its terms. SECTION 3.4. FINANCIAL STATEMENTS. None of Holland's Financial Statements or schedules included or incorporated by reference therein, contained when prepared or as of the date hereof any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein in light of the circumstances under which they were made not misleading. The Financial Statements of the Holland Companies fairly present, in conformity with GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of Holland and its consolidated 13 subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended, all in accordance with Title 9, Book 2 of the Netherlands Civil Code (the "NCC"). SECTION 3.5. INFORMATION SUPPLIED. None of the information supplied or to be supplied by Roberts or Holland to the Company will, at the time of execution hereof and at the time the purchase of the Shares is closed, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. SECTION 3.6. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings, permits, authorizations, consents and approvals as may be required under Netherlands or other Applicable Laws, including the filing and recordation of the notarial deed of transfer of the Shares, no filing with or notice to and no permit, authorization, consent or approval of any court or tribunal or Governmental Authority is necessary for the execution and delivery by Roberts of this Agreement or the consummation by Roberts or Holland of the transactions contemplated hereby, except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings or give such notice would not have a Material Adverse Effect on Holland. Neither the execution, delivery and performance of this Agreement by Roberts nor the consummation by Roberts of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the respective Articles of Incorporation or similar governing documents of Roberts or the Holland Companies, (ii) except as set forth in Section 3.6 of the Roberts Disclosure Schedule, result in a violation or breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration of any Encumbrance or the creation thereof) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to 14 which Holland or any of its subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound or (iii) except as set forth in Section 3.6 of the Roberts Disclosure Schedule, violate any order, writ, injunction, decree or the Applicable Laws with respect to the Holland Companies or any of their respective properties or assets except, in the case of (ii) or (iii), for violations, breaches or defaults which would not, individually or in the aggregate, have a Material Adverse Effect on Holland. SECTION 3.7. NO DEFAULT. (a) Except as set forth in Section 3.7(a) of the Roberts Disclosure Schedule, none of the Holland Companies is in breach, default or violation (and to the knowledge of Roberts or Holland no event has occurred which with notice or the lapse of time or both would constitute a breach, default or violation) of any term, condition or provision of (i) its Articles of Incorporation or similar governing documents, (ii) any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which any of the Holland Companies is now a party or by which any of them or any of their respective properties or assets may be bound or (iii) any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Holland Companies or any of their respective properties or assets except, in the case of (ii) or (iii), for violations, breaches or defaults that would not, individually or in the aggregate, have a Material Adverse Effect on Holland. (b) Section 3.7(b) of the Roberts Disclosure Schedule identifies each contract, agreement, lease or license with a monetary value of more than 100,000 Netherlands guilders which will remain in effect or require payment or performance by Holland or the Holland Companies from and after the Closing Date, excluding inter-company transactions conducted in the normal course of business. 15 SECTION 3.8. NO UNDISCLOSED LIABILITIES; ABSENCE OF CHANGES. Except as and to the extent disclosed in the Holland Financial Statements, or as otherwise set forth in Section 3.8 of the Roberts Disclosure Schedule, none of the Holland Companies has any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by GAAP to be reflected on a consolidated balance sheet of Holland (including the notes thereto), other than liabilities incurred in the ordinary course of business since December 31, 1996, which, individually or in the aggregate, would have a Material Adverse Effect on Holland. Except as set forth in Section 3.8 of the Roberts Disclosure Schedule, since December 31, 1996, there have been no events, changes or effects with respect to any of the Holland Companies having or which reasonably could be expected, individually or in the aggregate, to have a Material Adverse Effect on Holland. SECTION 3.9. LITIGATION. Except as set forth in Section 3.9 of the Roberts Disclosure Schedule, there are no Legal Proceedings pending or, to the Knowledge of Roberts or Holland, threatened against any of the Holland Companies or any of their respective properties or assets before any Governmental Authority which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect on Holland or could reasonably be expected to prevent or delay the consummation of the transactions contemplated by this Agreement. Except as set forth in Section 3.9 of the Roberts Disclosure Schedule, none of the Holland Companies is subject to any outstanding order, writ, injunction or decree which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect on Holland or could reasonably be expected to prevent or delay the consummation of the transactions contemplated hereby. SECTION 3.10. COMPLIANCE WITH APPLICABLE LAW. Except as set forth in Section 3.10 of the Roberts Disclosure Schedule, the Holland Companies hold all permits, licenses, variances, exemptions, orders and approvals of all governmental entities necessary for the lawful conduct of their respective businesses (the "Holland Permits") except for failures to hold such permits, licenses, 16 variances, exemptions, orders and approvals which, individually or in the aggregate, would not have a Material Adverse Effect on Holland. The Holland Companies are in compliance with the terms of the Holland Permits except where the failure so to comply would not have a Material Adverse Effect on Holland. Except as set forth in Section 3.10 of the Roberts Disclosure Schedule, the business of the Holland Companies is not being conducted in violation of all Applicable Laws of the country of incorporation or organization of each Holland Company or any foreign country or any political subdivision thereof or of any Governmental Authority, except (i) that no representation or warranty is made in this Section 3.10 with respect to Environmental Law and (ii) for violations or possible violations of any laws, ordinances or regulations which do not, and insofar as reasonably can be foreseen in the future, will not result in any charges, assessments, levies, fines or other liabilities being imposed upon or incurred by any of the Holland Companies that will equal 100,000 Netherlands guilders for any single violation or 200,000 Netherlands guilders in the aggregate. Except as set forth in Section 3.10 to the Roberts Disclosure Schedule, no investigation or review by any Governmental Authority with respect to any of the Holland Companies is pending or, to the Knowledge of Roberts or Holland, threatened nor, to the Knowledge of Roberts or Holland, has any Governmental Authority indicated an intention to conduct the same, other than such investigations or reviews as would not, individually or in the aggregate, have a Material Adverse Effect on Holland. SECTION 3.11. EMPLOYEE BENEFIT PLANS; LABOR MATTERS. (a) The Annex to Section 3.11 of the Roberts Disclosure Schedule contains a complete list of all full-time and part-time employees in the service of the Holland Companies, including the managing directors ("Holland Companies Employees"), setting out the date of entry into service, gross monthly salary, function, date of birth, emoluments and bonuses. Except as indicated in Section 3.11 of the Roberts Disclosure Schedule, there are no disputes outstanding with any of the Holland Companies Employees in relation to their 17 employment with the Holland Companies. Apart from the Holland Companies Employees, no person can claim to have a full-time or part-time employment agreement with the Holland Companies, whether oral or in writing. Except as set forth in Section 3.11(a) of the Roberts Disclosure Schedule, there are no employee bonus, stock, option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar fringe or employee benefit plans, programs or arrangements and any current or former employment or executive compensation or severance agreements written or otherwise maintained or contributed to for the benefit of or relating to any employee of Holland and its subsidiaries, any trade or business (whether or not incorporated) which is a member of a controlled group including Holland or which is under common control with Holland, nor any plan with respect to which any of the Holland Companies could incur liability if such plan has been or were terminated (together the "Holland Employee Benefit Plans"), excluding former agreements under which the Holland Companies have no remaining obligations. No event has occurred and, to the Knowledge of Roberts or Holland, there currently exists no condition or set of circumstances in connection with which any of the Holland Companies could be subject to any liability under the terms of any Holland Employee Benefit Plans, or any other applicable law, which would have a Material Adverse Effect on Holland. (b) Except as otherwise indicated in Section 3.11 of the Roberts Disclosure Schedule, the pensions of Holland Companies Employees are and can continue to be insured through AEGON Levensverzekering N.V. The obligations of the Holland Companies relating to this pension insurance have been fulfilled. (c) There are no controversies pending or, to the Knowledge of Roberts or Holland, threatened between the Holland Companies and any of the Holland Companies Employees which controversies have or may reasonably be expected to have a Material 18 Adverse Effect on Holland. None of the Holland Companies is a party to any collective bargaining agreement or other labor union contract applicable to Holland Companies Employees except as disclosed in Section 3.11(c) of the Roberts Disclosure Schedule nor does Roberts or Holland know of any activities or proceedings of any labor union to organize any Holland Companies Employees. Neither Roberts nor Holland has any Knowledge of any strikes, slowdowns, work stoppages, lockouts or threats thereof by or with respect to any Holland Companies Employees. For the purpose of this Agreement, "Holland Companies Employees" shall mean all persons employed, whether full or part-time, by any of the Holland Companies. SECTION 3.12. ENVIRONMENTAL LAWS AND REGULATIONS. (a) Except as set forth in Section 3.12 of the Roberts Disclosure Schedule, (i) each of the Holland Companies is in material compliance with each applicable Environmental Law except for non-compliance that would not have a Material Adverse Effect on Holland, which compliance includes, but is not limited to, the possession by the Holland Companies of all Holland Permits and other governmental authorizations required under applicable Environmental Law and compliance with the terms and conditions thereof; (ii) none of the Holland Companies has received written notice of or, to the Knowledge of Roberts or Holland, is the subject of any Legal Proceedings or notice by any person or entity alleging liability under or non-compliance with any Environmental Law (an "Environmental Claim") that could reasonably be expected to have a Material Adverse Effect on Holland; and (iii) to the Knowledge of Roberts and Holland, there are no circumstances that are reasonably likely to prevent or interfere with such material compliance in the future. (b) There are no Environmental Claims which could reasonably be expected to have a Material Adverse Effect on Holland that are pending or, to the Knowledge of Roberts 19 or Holland, threatened against any of the Holland Companies or, to the Knowledge of Roberts or Holland, against any person or entity whose liability for any Environmental Claim any of the Holland Companies has or may have retained or assumed either contractually or by operation of law. SECTION 3.13. TAXES. (a) Except as set forth in Section 3.13(a) of the Roberts Disclosure Schedule, the Holland Companies have accurately prepared and timely filed all Tax Returns they are required to have filed. Such Tax Returns are accurate and correct in all material respects and do not contain a disclosure statement of any prior inaccuracy in any material respect. (b) The Holland Companies have paid or adequately provided for all Taxes (whether or not shown on any Tax Return) they are required to have paid or to pay. (c) Except as set forth in Section 3.13(c) of the Roberts Disclosure Schedule, no audit or material claim for assessment or collection of Taxes is presently being conducted or asserted against any of the Holland Companies and none of the Holland Companies is a party to any Legal Proceeding by any governmental taxing authority nor does either Roberts or Holland have Knowledge of any such threatened audit, action, proceeding or investigation. (d) Except as set forth in Section 3.13(d) of the Roberts Disclosure Schedule, none of the Holland Companies is a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in connection with this Agreement or any change of control of Holland or the Holland Companies, in the payment or accrual of any Taxes. 20 SECTION 3.14. INTELLECTUAL PROPERTY. (a) Each of the Holland Companies owns or possesses adequate licenses or other valid rights to use all existing patents, trademarks, trade names, service marks, copyrights, trade secrets and applications therefor (the "Holland Intellectual Property Rights"), except where the failure to own or possess valid rights to use such Holland Intellectual Property Rights would not have a Material Adverse Effect on Holland. Schedule 3.14(a) of the Roberts Disclosure Schedule identifies the Holland Intellectual Property Rights. (b) Except for any of the following which would not reasonably be expected to have a Material Adverse Effect on Holland, (i) the validity of the Holland Intellectual Property Rights and the title thereto of Holland or any subsidiary, as the case may be, is not being questioned in any litigation to which any of the Holland Companies is a party, and (ii) except as set forth in Section 3.14(b) of the Roberts Disclosure Schedule, the conduct of the business of the Holland Companies as now conducted does not, to the Knowledge of Roberts or Holland, infringe any valid patents, trademarks, trade names, service marks, or copyrights of others. The consummation of the transactions completed hereby will not result in the loss or impairment of any Holland Intellectual Property Rights. (c) As set forth on Schedule 3.14(a) of the Roberts Disclosure Schedule, there is currently in effect a License and Distribution Agreement dated March 12, 1992, among Roberts Consolidated Industries, Inc. and the Roberts Europe Group as defined therein (the "License Agreement"). The parties acknowledge that the License Agreement is the subject of a separate purchase agreement by and between the sole stockholder of the Company and Roberts and that, accordingly, any rights under the License Agreement shall not be transferred by this Agreement to the Company. The Company hereby disclaims any rights in and to the intellectual property covered under the License Agreement. 21 SECTION 3.15. CERTAIN BUSINESS PRACTICES. None of Roberts or the Holland Companies has, or to the Knowledge of Roberts and Holland, has any member of the Supervisory Board, or the officers, agents or employees of Roberts or the Holland Companies (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or (iii) made any other unlawful payment. SECTION 3.16. BROKERS. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Holland by Roberts or any of the Holland Companies. SECTION 3.17. NO OTHER REPRESENTATIONS OR WARRANTIES. Except for representations and warranties contained in this Article III, neither Roberts nor any of the Holland Companies makes any other express or implied representation or warranty on behalf of Roberts or any of the Holland Companies. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Roberts as follows: SECTION 4.1. ORGANIZATION. (a) The Company is duly organized and validly existing under the laws of its jurisdiction of incorporation, and has all requisite power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted. (b) The Company is duly qualified or licensed to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions 22 where the failure to be so duly qualified or licensed would not have a Material Adverse Effect on the Company. SECTION 4.2. AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the supervisory board of the Company and by the sole stockholder of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid, legal and binding agreement of the Company enforceable against it in accordance with its terms. SECTION 4.3. CONSENTS AND APPROVALS; NO VIOLATIONS. Except as set forth in Section 4.3 of the Disclosure Schedule delivered by the Company to Roberts in accordance with Section 5.1 (the "Company Disclosure Schedule"), no filing with or notice to, and no permit, authorization, consent or approval of any Governmental Authority is necessary for the execution and delivery by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby, except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings or give such notice would not have a Material Adverse Effect on the Company. Neither the execution, delivery and performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the respective Articles of Incorporation or bylaws (or similar governing documents) of the Company, (ii) except as disclosed in Section 4.3 of the Company Disclosure Schedule, result in a violation or breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or 23 acceleration of an Encumbrance) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company is a party or by which it or its properties or assets may be bound, (iii) except as set forth in Schedule 4.3 of the Company Disclosure Schedule, violate any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Company or its properties or assets except, in the case of (ii) or (iii), for violations, breaches or defaults which would not have a Material Adverse Effect on the Company, or (iv) materially impair or delay the ability of the Company to perform its obligations under this Agreement or consummate the transactions contemplated hereby. SECTION 4.4. NO DEFAULT. The Company is not in breach, default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a breach, default or violation) of any term, condition or provision of (i) its Articles of Incorporation or bylaws (or similar governing documents), (ii) any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company is now a party or by which it or its properties or assets may be bound, (iii) any Applicable Laws relating to the Company or its properties or assets except, in the case of (ii) or (iii), for violations, breaches or defaults that would not have a Material Adverse Effect on the Company, or (iv) materially impair or delay the ability of the Company to perform its obligations under this Agreement or consummate the transactions contemplated hereby. SECTION 4.5. BROKERS. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. SECTION 4.6. NO PRIOR ACTIVITIES. Except for obligations incurred in connection with its incorporation or organization or the negotiation and consummation of this Agreement and the transactions contemplated hereby, the Company has neither incurred any obligation or liability nor 24 engaged in any business or activity of any type or kind whatsoever or entered into any agreement or arrangement with any person. SECTION 4.7. PURCHASE FOR INVESTMENT. The Company is acquiring the Shares for investment and has no intention to transfer, resell or distribute the Shares within one year of the date of purchase. SECTION 4.8. FINANCIAL CAPABILITY. The Company will have on or prior to the Closing Date sufficient funds to purchase the Shares and consummate the transactions contemplated by this Agreement. SECTION 4.9. NO OTHER REPRESENTATIONS OR WARRANTIES. Except for the representations and warranties contained in this Article IV, the Company makes no other express or implied representation or warranty. ARTICLE V COVENANTS SECTION 5.1. DISSOLUTION OF AND DISTRIBUTIONS FROM ROBERTS. Roberts and its stockholders will not undertake an actual, constructive or deemed distribution (whether in cash, stock or property or any combination thereof) or otherwise make payments to the Roberts stockholders in their capacity as such until the later of completion of the procedure set forth in Section 2.6 or 110 days from the Closing Date. Thereafter, distributions by Roberts will be permitted, provided that the net assets of Roberts do not fall below 10% of the Purchase Price for a two-year period from the Closing Date. During such two-year period, Roberts will not adopt or put into effect a plan of complete or partial liquidation, dissolution or other reorganization which has the effect of diminishing or decreasing the assets of Roberts available to satisfy any claims by the Company related hereto; provided, however, that Roberts may undertake any of the foregoing with the prior written consent of the Company and provided that, if there is such a liquidation, dissolution or other reorganization, 25 the shareholders of Roberts execute an agreement in form acceptable to the Company under which they will bear their proportionate responsibility for any claims made as a result of violations of covenants under this Agreement and any claims for Losses. SECTION 5.2. COMFORT LETTER. Holland shall cause BDO CampsObers to deliver a letter dated not more than ten (10) days after the Closing Date addressed to Roberts and Holland and their respective supervisory boards in form and substance reasonably satisfactory to the Company and customary in scope and substance for agreed-upon procedures letters delivered by independent registered accountants. SECTION 5.3. ADDITIONAL AGREEMENTS; REASONABLE EFFORTS. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all reasonable efforts to take or cause to be taken all action and to do or cause to be done all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, (i) cooperating in the preparation and filing of any documents required by any Governmental Authority; (ii) obtaining consents of all third parties and Governmental Authorities necessary, proper or advisable for the consummation of the transactions contemplated by this Agreement; (iii) contesting any Legal Proceeding relating hereto; and (iv) executing any additional instruments necessary to consummate the transactions contemplated hereby. If at any time after the Closing Date any further action is necessary to carry out the purposes of this Agreement, the proper officers and directors of each party hereto shall take all such necessary action. SECTION 5.4. PUBLIC ANNOUNCEMENTS. Upon execution hereof and immediately following the Closing, the parties may issue one or more press releases or otherwise make public statements with respect to the transactions contemplated by this Agreement. Each party shall furnish the other party a copy of any press release issued. 26 SECTION 5.5. INDEMNIFICATION. (a) Subject to the conditions set forth below, Roberts agrees to indemnify and hold harmless the Company and its supervisory board members, stockholders, officers, directors, partners, employees and agents (the "Company Indemnified Parties") against any and all loss, liability, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 5.5, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation) including, but not limited to, deficiencies, Taxes, interest, penalties, consequential damages, exemplary, special and punitive damages and lost profits (collectively "Losses") as and when incurred arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement, or the omission thereof, by Roberts of a material fact contained in this Agreement or the Roberts Disclosure Schedule, (ii) any breach of any representation, warranty, covenant, or agreement of Roberts contained in this Agreement, and (iii) subject to and in accordance with Section 2.6 hereof, the amount of Equity as at December 31, 1997, in the event such Equity is less than the amount of the Guaranteed Equity. Roberts shall not be liable to the Company Indemnified Parties for any Losses as referred to above, unless the aggregate amount of the Losses exceed an amount equal to 1% of the Purchase Price, as and if adjusted pursuant to Section 2.6 hereof (the "Threshold"), and then only up to an aggregate amount of such Losses equivalent to 10% of the Purchase Price, as and if adjusted pursuant to Section 2.6 hereof (the "Maximum Indemnification"), but excluding from such Maximum Indemnification any claims related to or arising from Roberts S.A.R.L., a wholly-owned French subsidiary of Roberts Holland, which have been disclosed to the Company in the Roberts Disclosure Schedule; provided, however, that the Maximum Indemnification shall not apply to (x) Losses for claims under Section 2.6 hereof, which shall 27 be subject to the maximum indemnification provided for in paragraph (c) of Section 2.6, and (y) Losses for claims under Section 3.13 hereof (Taxes), for which the obligation to indemnify shall be without limitation. (b) The Company agrees to indemnify and holds harmless Roberts and the Supervisory Board, stockholders, officers, directors, partners, employees and agents (the "Roberts Indemnified Parties") to the same extent as the foregoing indemnity from Roberts to the Company in Section 5.5(a), but only with respect to an untrue statement or alleged untrue statement, or the omission thereof, by the Company in this Agreement or the Company Disclosure Schedule or any breach of a representation, warranty, covenant of the Company in this Agreement. (c) Subject to Section 8.1, all claims for indemnification under this Section 5.5 shall be asserted and resolved as follows: (i) In the event that any claim or demand, or other circumstance or state of facts which could give rise to any claim or demand, for which an Indemnifying Party may be liable to an Indemnified Party hereunder is asserted against or sought to be collected by a third party (an "Asserted Liability"), the Indemnified Party shall as soon as reasonably possible notify the Indemnifying Party in writing of such Asserted Liability, specifying the nature of such Asserted Liability (the "Claim Notice"); provided, that no delay on the part of the Indemnified Party in giving any such Claim Notice shall relieve the Indemnifying Party of any indemnification obligation hereunder except to the extent that the Indemnifying Party is materially prejudiced by such delay. The Indemnifying Party shall have 60 Business Days (or less if the nature of the Asserted Liability requires) from its receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Party whether or not the Indemnifying Party desires, at the Indemnifying Party's sole cost and expense and by 28 counsel of its own choosing to defend against such Asserted Liability; provided, that if, under applicable standards of professional conduct a conflict on any significant issue between the Indemnifying Party and any Indemnified Party exists in respect of such Asserted Liability, then the Indemnifying Party shall reimburse the Indemnified Party for the reasonable fees and expenses of one additional counsel (who shall be reasonably acceptable to the Indemnifying Party). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld), consent to any settlement unless such settlement (i) includes a complete release of the Indemnified Party and (ii) does not require the Indemnified Party to make any payment or forego or taken any action. Notwithstanding the foregoing, the Indemnified Party shall have the right to control, pay or settle any Asserted Liability which the Indemnifying Party shall have undertaken to defend so long as the Indemnified Party shall also waive any right to indemnification therefor by the Indemnifying Party. If the Indemnifying Party undertakes to defend against such Asserted Liability, the Indemnified Party shall cooperate fully with the Indemnifying Party and its counsel in the investigation, defense and settlement thereof, but the Indemnifying Party shall control the investigation, defense and settlement thereof. If the Indemnified Party desires to participate in any such defense it may do so at its sole cost and expense. If the Indemnifying Party elects not to defend against such Asserted Liability, then the Indemnifying Party shall have the right to participate in any such defense at its sole cost and expense, but the Indemnified Party shall control the investigation, defense and settlement thereof at the reasonable cost and expense of the Indemnifying Party. The Indemnifying Party shall not be liable for any settlement of any Asserted Liability 29 effected without its prior written consent (which consent shall not be unreasonably withheld). (ii) In the event that an Indemnified Party should have a claim against the Indemnifying Party hereunder which does not involve a claim or demand being asserted against or sought to be collected from it by a third party, the Indemnified Party shall send a Claim Notice with respect to such claim to the Indemnifying Party. The Indemnifying Party shall have 60 Business Days from the date such Claim Notice is delivered during which to notify the Indemnified Party in writing of any good faith objections it has to be the Indemnified Party's Claim Notice or claims for indemnification, setting forth in reasonable detail each of the Indemnifying Party's objections thereto. If the Indemnifying Party does deliver such written notice of objection within such 60 Business Day period, the Indemnifying Party and the Indemnified Party shall attempt in good faith to resolve any such dispute within 60 days of the delivery by the Indemnifying Party of such written notice of objection. (d) All amounts paid by the Company or Roberts, as the case may be, under this Section 5.5 shall be treated as adjustments to the Purchase Price for all Tax purposes. (e) The amount of any Losses for which indemnification is provided under this Section 5.5 shall be reduced by (x) any related Tax benefits if and when actually realized or received (but only after taking into account any Tax benefits (including, without limitation, any net operating losses or other deductions and any carryovers or carrybacks) to which the Indemnified Party would be entitled without regard to such item), except to the extent such recovery has already been taken into account in determining the amount of any such Losses, and (y) any insurance recovery if and when actually realized or received, in each case in respect of such Losses. Any such recovery shall be promptly repaid by the Indemnified Party 30 to the Indemnifying Party following the time at which such recovery is realized or received pursuant to the previous sentence, minus all reasonably allocable costs, charges and expenses incurred by the Indemnified Party in obtaining such recovery. Notwithstanding the foregoing, if (x) the amount of Indemnifiable Losses for which the Indemnifying Party is obligated to indemnify the Indemnified Party is reduced by any Tax benefit or insurance recovery in accordance with the provisions of the previous sentence, and (y) the Indemnified Party subsequently is required to repay the amount of any such Tax benefit or insurance recovery or such Tax benefit or insurance recovery is disallowed, then the obligation of the Indemnifying Party to indemnify with respect to such amounts shall be reinstated immediately and such amounts shall be paid promptly to the Indemnified Party in accordance with the provisions of this Agreement. SECTION 5.6. TAX MATTERS. Roberts shall include the Holland Companies or cause the Holland Companies to be included in, and shall timely file or cause to be timely filed, Tax Returns of Roberts or its Affiliates for the taxable periods of the Holland Companies ending on or prior to December 31, 1997, and shall pay any and all Taxes due with respect to the returns and shall be entitled to any and all Tax benefits, including any tax loss carry-forward arising therefrom. The Tax Returns referred to in this section shall be prepared in a manner consistent with the prior practice of the Holland Companies unless otherwise required by a change in applicable Tax laws, rules or regulations. Roberts shall provide the Company with copies of such Tax Returns prior to the filing thereof. The Company shall have the right to review and comment on such Tax Returns for 15 days following receipt thereof. Nothing contained in the foregoing shall in any manner terminate, limit or adversely affect any right of Company 31 Indemnified Parties or Roberts Indemnified Parties to receive indemnification pursuant to any provision in this Agreement. In addition to the Tax Returns referred to above, Roberts shall prepare all other Tax Returns of, or which include, any of the Holland Companies for taxable periods that end on, end prior to or which include December 31, 1997. To the extent any such Tax Returns are required to be filed (taking into account any extensions) on or prior to the Closing Date, Roberts shall timely file or shall cause the Holland Companies to timely file such Tax Returns and shall pay any and all Taxes due with respect to such Tax Returns. For income tax purposes, the taxable year of the Holland Companies shall end as of December 31, 1997. Neither Roberts nor the Company shall take any position inconsistent with the preceding sentence on any Tax Return. The Company and Roberts shall retain in their possession, and shall provide each other reasonable access to (including the right to make copies of), such supporting books and records and any other materials with respect to Tax matters. After expiration of the applicable statute of limitations, the Company or Roberts, as the case may be, may dispose of such material. If any taxing authority asserts a claim, makes an assessment or otherwise disputes or affects the Tax reporting position of the Holland Companies for taxable periods ending on or prior to December 31, 1997, the Company shall, promptly upon receipt by the Company or any of the Holland Companies of notice thereof, inform Roberts thereof. Roberts shall be responsible for representing the interests of the Holland Companies in any Tax audit or administrative or court proceeding relating to taxable periods of the Holland Companies which end on or before December 31, 1997 and to employ counsel of its choice at its expense. The Company agrees that it will cooperate fully with Roberts and 32 its counsel in the defense against or compromise of any claim in any said proceeding. Roberts agrees that it will not settle any such proceeding in a manner that has a Material Adverse Effect on the Company for any taxable period that ends after December 31, 1997. Roberts agrees that it will keep the Company fully informed as to the status and resolution of any such proceeding. The Company shall have the sole right to represent the interests of the Holland Companies in any Tax audit or administrative or court proceeding relating to taxable periods of the Holland Companies which begin after December 31, 1997 and to employ counsel of its choice at its expense. The Company agrees that it will not settle any such proceeding in a manner which has a Material Adverse Effect on Roberts for any taxable period that ends on, ends prior to or which includes December 31, 1997. Roberts shall not take any position on any Tax Return, Tax refund claim or in any Tax audit or administrative or court proceeding that is inconsistent with this Agreement, unless otherwise required by applicable Tax laws, rules or regulations. Roberts shall not file any amended Tax Return or file or apply for any Tax refund with respect to any Holland Company without the consent of the Company, which consent shall not be unreasonably withheld, it being understood and agreed that the foregoing shall not apply to the utilization of any loss arising on the sale of the Shares. To the extent any determination of Tax liability of the Holland Companies results in any refund of Taxes paid with respect to (i) any period which ends on or before December 31, 1997 or (ii) any period which includes December 31, 1997 but does not begin or end on that day, any such refund shall belong to Roberts, provided that any Tax refund described in clause (i) or (ii) of this section that is attributable to a carryback with respect to income Taxes arising after December 31, 1997 shall belong to the Company to the extent that the Company is not 33 permitted under the applicable state or local law to elect to carry forward the relevant tax attribute and provided further that in the case of any Tax refund described in clause (ii) of this section the portion of such Tax refund which shall belong to Roberts shall be that portion that is attributable to the portion of that period which ends on December 31, 1997 (determined on the basis of an interim closing of the books as of December 31, 1997), and the Company shall promptly pay any such refund that belongs to Roberts, and the interest actually received thereon, to Roberts upon receipt thereof by the Company. Any payments made under this section shall be net of any Taxes payable with respect to such refund, credit or interest thereon (taking into account any actual reduction in Tax liability realized upon the payment pursuant to this section). SECTION 5.7. COVENANTS OF HOLLAND COMPANIES. Except as otherwise expressly provided in this Agreement, any and all covenants or agreements of the Holland Companies set forth in this Agreement shall be the covenants or agreements, as the case may be, of Roberts as the sole stockholder of the Holland Companies and as a party to this Agreement. SECTION 5.8. ROBERTS DISCLOSURE SCHEDULE. (a) Roberts shall have delivered the Roberts Disclosure Schedule no later than 25 days after the scheduled Closing Date. The matters set forth therein shall not, individually or in the aggregate, have or describe a Material Adverse Effect with respect to the Holland Companies, except to the extent such matters having or describing any Material Adverse Effect have already been set forth in the most recent draft of the Roberts Disclosure Schedule delivered by Roberts to the Company prior to the Closing. Roberts represents that any matters added to the Roberts Disclosure Schedule subsequent to the Closing shall not have a Material Adverse Effect on the Holland Companies. 34 (b) If Roberts or Holland has updated, amended or supplemented the Roberts Disclosure Schedule, the matters included in such updates, amendments or supplements shall not, individually or in the aggregate, have or describe a Material Adverse Effect with respect to the Holland Companies. Such update, amendment or supplement shall not include any information that constitutes a Material Adverse Effect with respect to the Holland Companies. (c) If any matters set forth in the Roberts Disclosure Schedule pursuant to Section 5.8(a) or 5.8(b) have or describe a Material Adverse Effect with respect to the Holland Companies, the financial effect of such Material Adverse Effect shall be addressed by the parties through the procedure described in Section 2.6 hereof. ARTICLE VI CONDITIONS TO CLOSING SECTION 6.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CLOSE. The respective obligations of each party hereto to close are subject to the satisfaction at or prior to the Closing Date of the following: No statute,rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or enforced by any governmental authority which prohibits, restrains, enjoins or restricts the consummation of the transaction described herein. SECTION 6.2. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligation of the Company to close is subject to the satisfaction or waiver at or prior to the Closing of the following conditions: (a) Each of the representations of Roberts contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct in all material respects at and as of the Closing Date with the same effect as if made at and as of the Closing Date (except to the extent such representations specifically related to an earlier date, in which case 35 such representations shall be true and correct as of such earlier date) and, at the Closing, Roberts shall have delivered to the Company a certificate to that effect; (b) Each of the covenants and obligations of Roberts to be performed at or before the Closing pursuant to the terms of this Agreement shall have been duly performed in all material respects at or before the Closing and, at the Closing, Roberts shall have delivered to the Company a certificate to that effect; (c) The Company shall have received the opinion of Nauta Dutilh as to the matters set forth in Exhibit A not later than three business days from the date of execution hereof; (d) Holland shall have obtained the consent or approval of each person whose consent or approval shall be required in connection with the transactions contemplated hereby under any loan or credit agreement, note, mortgage, indenture, lease, or other agreement or instrument, except those for which failure to obtain such consents and approvals would not, in the reasonable opinion of the Company, individually or in the aggregate, have a Material Adverse Effect on the Company; and (e) There shall have been no events, changes or effects with respect to the Holland Companies having or which could reasonably be expected to have a Material Adverse Effect on Holland. SECTION 6.3. CONDITIONS TO THE OBLIGATIONS OF ROBERTS. The obligations of Roberts to close are subject to the satisfaction or waiver at or prior to the Closing Date of the following conditions: (a) Each of the representations of the Company contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct in all material respects at and as of the Closing Date with the same effect as if made at and as of the Closing Date (except to the extent such representations specifically related to an earlier date, 36 in which case such representations shall be true and correct as of such earlier date) and, at the Closing, the Company shall have delivered to Roberts a certificate to that effect; (b) Each of the covenants and obligations of the Company to be performed at or before the Closing Date pursuant to the terms of this Agreement shall have been duly performed in all material respects at or before the Closing Date and, at the Closing, the Company shall have delivered to Roberts a certificate to that effect; and (c) Roberts shall have received the opinion of legal counsel to the Company as to the matters set forth in Exhibit B. ARTICLE VII TERMINATION; AMENDMENT; WAIVER SECTION 7.1. TERMINATION. This Agreement may be terminated at any time prior to the Closing Date: (a) By mutual written consent of Roberts and the Company; (b) By either Roberts or the Company if (i) any court of competent jurisdiction in the Netherlands or other Netherlands Governmental Authority shall have issued a final order, decree or ruling or taken any other final Legal Proceeding restraining, enjoining or otherwise prohibiting the purchase of the Shares and such order, decree, ruling or other action is or shall have become nonappealable or (ii) the purchase of the Shares has not been consummated by January 31, 1998; provided that no party may terminate this Agreement pursuant to this clause (ii) if such party's failure to fulfill any of its obligations under this Agreement shall have been the reason that the Closing shall not have occurred on or before said date; 37 (c) By the Company if (i) There shall have been a breach of any representation or warranty on the part of Roberts set forth in this Agreement or if any representation or warranty of Roberts shall have become untrue, and such breach shall not have been cured or such representation or warranty shall not have been made true within ten Business Days after written notice by Company thereof, provided that the Company has not breached any of its obligations hereunder; or (ii) There shall have been a breach by Roberts of its covenants or agreements hereunder having a Material Adverse Effect on the Holland Companies or materially adversely affecting (or materially delaying) the consummation of the purchase of the Shares, and Roberts has not cured such breach within ten Business Days after written notice by the Company thereof, provided that the Company has not breached any of its obligations hereunder. (d) By Roberts if (i) There shall have been a breach of any representation or warranty on the part of the Company set forth in this agreement or if any representation or warranty of the Company shall have become untrue, and such breach shall not have been cured or such representation or warranty shall not have been made true within ten Business Days after written notice by Roberts thereof, provided that Roberts has not breached any of its obligations hereunder; or (ii) There shall have been a breach by the Company of its covenants or agreements hereunder having a Material Adverse Effect on the Company or materially adversely affecting (or materially delaying) the consummation of the purchase of the Shares, and the Company has not cured such breach within ten Business Days after 38 written notice by Roberts thereof, provided that Roberts has not breached any of its obligations hereunder. SECTION 7.2. EFFECT OF TERMINATION. In the event of the termination and abandonment of this Agreement pursuant to Section 7.1, this Agreement shall forthwith become void and have no effect without any liability on the part of any party hereto or its Affiliates, supervisory board members, directors, officers or stockholders other than the provisions of this Section 7.2 and Section 7.3 hereof. Nothing contained in this Section 7.2 shall relieve any party from liability for any breach of this Agreement. SECTION 7.3. FEES AND EXPENSES. Except as otherwise provided in this Agreement, each party shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. SECTION 7.4. AMENDMENT. This Agreement may be amended by action taken by the Company and Roberts at any time prior to the Closing. This Agreement (including the Roberts Disclosure Schedule and the Company Disclosure Schedule) may be amended only by an instrument in writing signed on behalf of the parties hereto. SECTION 7.5. EXTENSION; WAIVER. At any time prior to the Closing, Roberts on the one hand, and the Company, on the other, may (i) extend the time for the performance of any of the obligations or other acts of the other party, (ii) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document certificate or writing delivered pursuant hereto or (iii) waive compliance by the other party with any of the agreements or conditions contained herein. Any agreement on the part of any party hereto to any such extension or waiver shall be valid only if set forth in an instrument, in writing, signed on behalf of such party. The failure of any party hereto to assert any of its rights hereunder shall not constitute a waiver of such rights. 39 ARTICLE VIII MISCELLANEOUS SECTION 8.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of the Company and Roberts contained in this Agreement and all claims and causes of action with respect thereto shall terminate upon the second anniversary of the Closing Date. In the event notice of a claim for indemnification under this Agreement is given within the applicable survival period, the representations and warranties that are the subject of such indemnification claim shall survive with respect to such claim until such time as such claim is fully resolved. This Section 8.1 shall not limit any covenant or agreement of the parties hereto which by its terms requires performance after the Closing. SECTION 8.2. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including the Roberts Disclosure Schedule and the Company Disclosure Schedule) (a) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and understandings both written and oral between the parties with respect to the subject matter hereof and (b) shall not be assigned by operation of law or otherwise. SECTION 8.3. VALIDITY. If any provision of this Agreement or the application thereof to any person or circumstance is held invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby and to such end the provisions of this Agreement are agreed to be severable. SECTION 8.4. NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by facsimile or by registered or certified mail (postage prepaid, return receipt requested) to each other party as follows: 40 If to the Company: Q.E.P. Holding B.V. c/o Q.E.P. Company, Inc. 1081 Holland Drive Boca Raton, Florida 33487 (561) 241-2830 (fax) Attention: Lewis Gould, President Marc Applebaum, Chief Financial Officer With a copy to: Berliner Zisser Walter & Gallegos, P.C. 1700 Lincoln Street, Suite 4700 Denver, Colorado 80203 (303) 830-1705 (fax) Attention: Robert W. Walter, Esq. If to Roberts or Holland: Roberts Holland B.V. P.O. Box 64, Parallelweg 3360 AB Sliedrecht The Netherlands (31) (0) 184-495758 (fax) Attention: Marinus Schimmel With a copy to: Nauta Dutilh Bowman House 29 Wilson Street London EC2M 25J United Kingdom (44) (0) (171) 588 6888 (fax) Attention: Dirk W. Blaisse, Esq. or to such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth above. SECTION 8.5. GOVERNING LAW AND JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the Netherlands. Any dispute arising in connection with this Agreement or any further agreement resulting from or concluded in connection with this Agreement shall be brought before a competent court in Rotterdam, the Netherlands. SECTION 8.6. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 41 SECTION 8.7. PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and its successors and permitted assigns and, except as provided in Section 8.2, nothing in this Agreement express or implied is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 8.8. PERSONAL LIABILITY. This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect stockholder of the Company, Roberts or Holland or any supervisory board member, officer, director, employee, agent, representative or investor of any party hereto. SECTION 8.9. SPECIFIC PERFORMANCE. The parties hereby acknowledge and agree that the failure of any party to perform its agreements and covenants hereunder, including its failure to take all actions as are necessary on its part to the Closing of the purchase of the Shares, will cause irreparable injury to the other parties, for which damages, even if available, will not be an adequate remedy. Accordingly, each party hereby consents to the issuance of injunctive relief by any court of competent jurisdiction to compel performance of such party's obligations and to the granting by any court of the remedy of specific performance of its obligations hereunder. SECTION 8.10. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. SECTION 8.11. WAIVER OF RESCISSION. The parties hereto waive their rights under Articles 6:265 ET SEQ. of the NCC to claim rescission ("ONTBINDING") of this Agreement except if such rescission is claimed pursuant to Section 7.1 hereof. 42 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf to be effective as of the day and year first above written. Q.E.P. HOLDING B.V. By:______________________________________ ROBERTS BEHEER B.V. By:______________________________________ 43 EXHIBIT A MATTERS TO BE COVERED BY OPINION OF LEGAL COUNSEL TO ROBERTS (i) The execution and delivery of the Agreement by Roberts and the consummation of the transactions contemplated thereby have been duly and validly authorized by Roberts, the Supervisory Board and the holder of the outstanding Shares and no other corporate proceedings on the part of Roberts are necessary to authorize the Agreement or to consummate the transactions contemplated thereby; (ii) Roberts has all requisite corporate power and authority to execute and deliver the Agreement and to consummate the transactions contemplated thereby; (iii) The Agreement has been duly and validly executed and delivered by Roberts and constitutes a valid and binding agreement of Roberts, enforceable against Roberts in accordance with its terms; (iv) Based on the representations of the management board and the assumption that the shareholder register has been complete since 1994 upon payment of the Purchase Price, and upon execution and filing of the notarial deed of transfer, the Shares will be owned by the Company, free and clear of any encumbrances; (v) The descriptions in the Agreement and the Roberts Disclosure Schedule of legal and governmental proceedings, contracts and other documents are accurate and fairly present the information required to be shown, and such counsel does not know of any legal or governmental proceedings required to be described in the Agreement or the Roberts Disclosure Schedule thereto which is not described therein as required, or of any contracts or documents of a character required to be described in the Agreement or the Roberts Disclosure Schedule that are not described or included as required. (vi) Neither the execution, delivery and performance of the Agreement by Roberts nor the consummation by Roberts of the transactions contemplated thereby will conflict with or result in any breach of any provision of the respective articles of association or bylaws (or similar governing documents) of Holland or any of its subsidiaries; (vii) No filing with or notice to and no permit, authorization, consent or approval of any Governmental Authority is necessary for the execution and delivery by Roberts of this Agreement or the consummation by Roberts of the transactions contemplated hereby, except (a) for such filings, notifications, permits, authorizations, consent or approvals as have already been made, given or obtained, or (b) where the failure to obtain such permits, authorizations, consents or approvals or to make such filings or give such notice would not have a Material Adverse Effect on Holland. 44 EXHIBIT B MATTERS TO BE COVERED BY LEGAL COUNSEL TO THE COMPANY (i) The execution and delivery of the Agreement by the Company and the consummation of the transactions contemplated thereby have been duly and validly authorized by the Company and the Supervisory Board and no other corporate proceedings on the part of Roberts are necessary to authorize the Agreement or to consummate the transactions contemplated thereby; (ii) The Company has all requisite corporate power and authority to execute and deliver the Agreement and to consummate the transactions contemplated thereby; (iii) The Agreement has been duly and validly executed and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms; (iv) The descriptions in the Agreement and the Company Disclosure Schedule of legal and governmental proceedings, contracts and other documents are accurate and fairly present the information required to be shown, and such counsel does not know of any legal or governmental proceedings required to be described in the Agreement or the Company Disclosure Schedule thereto which is not described therein as required, or of any contracts or documents of a character required to be described in the Agreement or the Company Disclosure Schedule that are not described or included as required. 45 EX-10.3.5 3 PURCHASE AND SALE AGREEMENT THIS AGREEMENT is made and entered effective December 31, 1997, by and among ROBERTS BEHEER B.V., a company organized under the laws of the Netherlands ("Roberts Beheer" or the "Seller"), Q.E.P. CO., INC., a corporation organized under the laws of Delaware ("Q.E.P." or the "Purchaser"), and Roberts Consolidated Industries, Inc., a corporation organized under the laws of Delaware and which is wholly-owned by Q.E.P. ("Roberts USA"). RECITALS WHEREAS, on or about March 12, 1992, Seller and certain affiliated parties entered into a License and Distribution Agreement (the "License Agreement"), pursuant to which, among other things, Seller was granted an exclusive license by Roberts USA to use the Intellectual Property (hereinafter defined) of Roberts USA within the Territory (hereinafter defined); and WHEREAS, effective December 31, 1997, Roberts Beheer and Q.E.P. Holding B.V. entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to which Q.E.P. Holding B.V. will purchase, and Roberts Beheer will sell, all of the outstanding capital stock of Roberts Holland; and WHEREAS, Purchaser desires to purchase, and Seller desires to sell, all of the Seller's rights, privileges, benefits, title and interest to the License Agreement and the Intellectual Property; NOW, THEREFORE, in consideration of the mutual agreements contained herein, and in reliance upon the representations and warranties contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement, the License Agreement and its Exhibits and Schedules are attached hereto and are incorporated herein as Exhibit "I." All terms used herein shall have the same meaning as set forth in the License Agreement, except any terms used in this Agreement which are not defined in the License Agreement shall have the meaning set forth as definitions in this Article, unless the specific context clearly requires a different meaning. The singular used in any defined terms shall include the plural and the plural use shall include the singular. AGREEMENT means this Agreement and all Exhibits and Schedules hereto. CLOSING has the meaning given to it in Section 2.3. CLOSING DATE has the meaning given to it in Section 2.3. INTELLECTUAL PROPERTY means all Trademarks, Tradenames and Technical Information, including trade dress logos, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith, and all applications, registrations and renewals in connections therewith, all other proprietary rights and all copies and tangible embodiments thereof (in whatever form or medium), granted to Seller pursuant to the License Agreement. KNOWLEDGE means, when used in the context of Knowledge of Seller, the actual Knowledge of the officers, directors, employees, agents or representatives of Roberts Beheer. LICENSE AGREEMENT means that certain License and Distribution Agreement, dated March 12, 1992, by and among Seller, certain subsidiaries of Seller and Roberts USA, and all underlying rights, privileges, benefits, title and interest to, among other things, the Trademarks, Tradenames, Products and Technical Information thereto (as defined in the License Agreement). PURCHASE PRICE has the meaning given it in Section 2.2. PURCHASER means Q.E.P. Co., Inc., a corporation organized under the laws of Delaware. -2- SELLER means Roberts Beheer B.V., a company organized under the laws of the Netherlands. ARTICLE II PURCHASE OF THE LICENSE AGREEMENT Subject to the terms and conditions set forth in this Agreement: SECTION 2.1 PURCHASE OF LICENSE AGREEMENT. At the Closing, as defined below, Seller shall endorse and deliver such instruments, documents, certificates or instructions as may be necessary to transfer and convey all of Seller's rights, title and interest in and to the License Agreement and its underlying Intellectual Property rights, privileges and benefits thereto to Purchaser (the "Purchase"). Upon receipt of such documents, instruments, certificates or instructions, and upon the Closing, Purchaser shall become the beneficial and record holder of the License Agreement and entitled to all of the rights, benefits and privileges with respect thereto, free of all encumbrances, liens, security interests or other claims, and any and all obligations of the Seller under or in relation to the License Agreement as from the Closing Date shall be transferred to, assumed and accepted by the Purchaser. SECTION 2.2 PURCHASE PRICE FOR THE LICENSE AGREEMENT. The aggregate purchase price for the License Agreement and its underlying Intellectual Property rights, privileges and benefits thereto shall consist of cash in the amount of Two Hundred Eighty-Eight Thousand U.S. Dollars ($288,000.00) (the "Purchase Price"), which shall be delivered to Seller at the Closing subject to and upon the terms and conditions hereof and the representations and warranties contained herein, and which shall be paid in the form of a wire transfer of immediately available funds through a financial institution designated by the Seller. Such payment shall be $288,000.00 U.S. Dollars. SECTION 2.3 CLOSING. The closing of this Agreement (the "Closing") shall take place at the offices of Schut/van Os Notarissen, Honthortstraat 3, Amsterdam on January 20, 1998 (the "Closing -3- Date"), or such other place or date as the parties hereto may agree, but no later than January 31, 1998. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Purchaser that the statements contained in this Article III are true, correct and complete in all material respects as of the date of this Agreement. SECTION 3.1 AUTHORIZATION. This Agreement has been duly and validly executed and delivered by Seller and the agreements, representations and warranties contained herein constitute valid and binding obligations, representations and warranties of Seller enforceable in accordance with their terms. This Agreement and the consummation of the transactions contemplated hereby have been duly and unanimously approved by the management board of Seller. SECTION 3.2 NO CONFLICTING AGREEMENTS. The execution and delivery of this Agreement by Seller does not, and consummation by Seller of the transactions contemplated hereby will not, (a) to the Knowledge of Seller, violate any existing term or provision of any law, regulation, order, writ, judgment, injunction or decree applicable to Seller or to the License Agreement or its underlying Intellectual Property rights, benefits or privileges, (b) conflict with or result in a breach of any of the terms, conditions or provisions of the articles of association or bylaws (or similar governing documents) of Seller or of any material agreement or instrument to which Seller is a party, or (c) result in the creation or imposition of any lien, charge, security interest, encumbrance, restriction or claim upon the License Agreement or the underlying Intellectual Property rights, benefits or privileges. SECTION 3.3 MATERIAL MISSTATEMENTS OR OMISSIONS. Neither this Agreement nor any other document, certificate or written statement furnished to Purchaser by or on behalf of Seller in connection with this Agreement contains any untrue statement of a material fact, or omits any -4- material fact necessary to make the statements contained herein or therein not misleading in light of the context in which they were made. SECTION 3.4 NO KNOWN ADVERSE EFFECTS. Seller has no Knowledge of any fact which materially adversely affects, or will materially adversely affect, the Purchase which has not been set forth in writing in this Agreement or disclosed in the other documents, certificates or written statements furnished to Purchaser by or on behalf of Seller in connection herewith. SECTION 3.5 CONSENTS AND APPROVALS. The execution and delivery by Seller of this Agreement, and the performance by Seller of its obligations hereunder, does not require Seller to obtain any consent, approval, agreement, or action of, or make any filing with or give any notice to, any corporation, person, entity, or firm or any public, governmental or judicial authority except (i) such as have been duly obtained or made, as the case may be, and/or will be duly obtained and made and in full force and effect as of the Closing, (ii) those as to which the failure to obtain would have no material adverse effect on the Purchase or the License Agreement, and (iii) approval of the Seller's management board, which shall be obtained prior to the execution hereof. SECTION 3.6 LITIGATION. There are no actions, proceedings or investigations pending or, to the Knowledge of Seller, threatened against Seller, concerning the License Agreement or the underlying Intellectual Property rights thereto, before any court or administrative agency which could result in any material adverse effect on the License Agreement or the underlying Intellectual Property rights, benefits or privileges thereto. Furthermore, no employee or former employee of Seller has any claim with respect to any Intellectual Property rights of Seller or any claim with respect to the License Agreement or the underlying Intellectual Property rights, benefits or privileges thereto. SECTION 3.7 REGISTRATIONS. All registrations which are listed on EXHIBIT 3.8 are in good standing, valid, subsisting and in full force and effect in accordance with their terms. None of the Intellectual Property or Seller's right thereto is, to Seller's Knowledge, being infringed or otherwise -5- violated by any person or entity. The use of the Intellectual Property by the Seller, the use and sale by or for Seller of Products incorporating the Intellectual Property and the use or application of Products incorporating the Intellectual Property by customers of Seller in accordance with promotions or recommendations of Seller, do not to Seller's Knowledge, infringe or otherwise violate any rights of any person or entity solely as a result of the use, sale, application or incorporation of such Intellectual Property, and there is no pending or, to Seller's Knowledge, threatened claim alleging any such infringement or violation. In addition, there is no pending or, to Seller's Knowledge, threatened claim alleging any defect in or invalidity, misuse or unenforceability of or challenging the ownership or use of or Seller's rights with respect to any of the Intellectual Property rights. SECTION 3.8 TITLE TO INTELLECTUAL PROPERTY. The License Agreement to be transferred to Purchaser pursuant to this Agreement includes all of the rights, title and interest granted to and used by Seller pursuant to the License Agreement. The execution and delivery of this Agreement and related documents by the parties and the payment by Purchaser to Seller of the Purchase Price set forth in Section 2.1 hereof will result in Purchaser's immediate acquisition of all right, title and interest to the License Agreement and the underlying Intellectual Property rights, benefits and privileges thereto, free and clear of any liens, encumbrances, security agreements, equities, options, claims, charges and restrictions. SECTION 3.9 DISCLOSURE. To the Knowledge of Seller, Seller has disclosed to Purchaser all material facts and information relating to the License Agreement and all underlying Intellectual Property rights, interest, benefits and privileges thereto. -6- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Sellers that the statements contained in this Article V are true, correct and complete as of the date of this Agreement. SECTION 4.1 ORGANIZATION AND QUALIFICATION OF PURCHASER. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the full corporate power and authority to own and operate its properties and to carry on its business. SECTION 4.2 AUTHORIZATION. This Agreement and all other agreements contemplated hereby to be executed and delivered by Purchaser have been duly and validly authorized by the board of directors of Purchaser, duly and validly executed and delivered by Purchaser, and the agreements, representations, and warranties contained herein and therein constitute valid and binding obligations, representations, and warranties of Purchaser enforceable in accordance with their respective terms. SECTION 4.3 MATERIAL MISSTATEMENTS OR OMISSIONS. Neither this Agreement nor any other document, certificate or statement furnished to Seller by or on behalf of Purchaser in connection with this Agreement contains any untrue statement of a material fact, or omits any material fact necessary to make the statements contained herein and therein not misleading in light of the context in which they were made. SECTION 4.4 NO KNOWN ADVERSE EFFECTS. Roberts USA has no knowledge of any infringement of the terms and conditions of the License Agreement by Seller except as set forth on Exhibit 4.4. ARTICLE V INDEMNIFICATION SECTION 5.1 INDEMNIFICATION. For purposes of this Agreement, the indemnification provisions set forth in Section 5.5 of the Stock Purchase Agreement are incorporated herein and -7- apply to the parties hereto as if set forth in full. Notwithstanding the preceding sentence, for purposes of this Agreement, the Maximum Indemnification (as defined in the Stock Purchase Agreement) in connection with the Purchase shall be 10% of the Purchase Price (as defined in Section 2.2 herein). ARTICLE VI MISCELLANEOUS SECTION 6.1 NOTICE. All notices required or permitted to be given hereunder shall be in writing, signed by the sender, and delivered by personal delivery overnight courier service or by registered or certified mail to: If to Purchaser: Q.E.P. Co., Inc. 1081 Holland Drive Boca Raton, Florida 33487 (561) 241-2830 (fax) Attention: Lewis Gould, President Marc Applebaum, Chief Financial Officer With a copy to: Berliner Zisser Walter & Gallegos, P.C. 1700 Lincoln Street, Suite 4700 Denver, Colorado 80203-4547 Attention: Robert W. Walter, Esq. If to Seller: Roberts Beheer B.V. P.O. Box 64, Parallelweg 3360 AB Sliedrecht The Netherlands (31) (0) 184-495758 (fax) Attention: Marinus Schimmel With a copy to: Nauta Dutilh Bowman House 29 Wilson Street London EC2M 25J United Kingdom (44) (0) (171) 588 6888 (fax) Attention: Dirk W. Blaisse, Esq. or to such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth above. -8- SECTION 6.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of the parties contained in this Agreement and all claims and causes of action with respect thereto shall terminate upon the second anniversary of the Closing Date. In the event notice of a claim for indemnification under this Agreement is given within the applicable survival period, the representations and warranties that are the subject of such indemnification claim shall survive with respect to such claim until such time as such claim is fully resolved. This Section 6.2 shall not limit any agreement of the parties hereto which by its terms requires performance after the Closing. SECTION 6.3 FURTHER ASSURANCES. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, the parties will take such further action (including the execution and delivery of such further instruments and documents) as any other party reasonably may request. The parties agree to use their best efforts in good faith to satisfy the various conditions to Closing required to be satisfied by them and to consummate the transactions provided for herein as expeditiously as possible. The parties will not take or knowingly permit to be taken any action that would be in breach of the terms or provisions of this Agreement or that would cause any of their representations and warranties contained herein to be or become untrue in any material respect. SECTION 6.4. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including all exhibits and schedules attached hereto) (a) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and understandings both written and oral between the parties with respect to the subject matter hereof, and (b) shall not be assigned by operation of law or otherwise. SECTION 6.5. VALIDITY. If any provision of this Agreement or the application thereof to any person or circumstance is held invalid or unenforceable, the remainder of this Agreement and the -9- application of such provision to other persons or circumstances shall not be affected thereby and to such end the provisions of this Agreement are agreed to be severable. SECTION 6.6. GOVERNING LAW AND JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. Any dispute arising in connection with this Agreement or any further agreement resulting from or concluded in connection with this Agreement shall be brought before a competent court in Delaware, United States of America. SECTION 6.7. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. SECTION 6.8. PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and its successors and permitted assigns and, except as provided in Section 6.4, nothing in this Agreement express or implied is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 6.9. PERSONAL LIABILITY. This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect stockholder of the Purchaser or Seller or any supervisory board member, officer, director, employee, agent, representative or investor of any party hereto. SECTION 6.10. SPECIFIC PERFORMANCE. The parties hereby acknowledge and agree that the failure of any party to perform its agreements hereunder, including its failure to take all actions as are necessary on its part to the Closing of the Purchase, will cause irreparable injury to the other parties, for which damages, even if available, will not be an adequate remedy. Accordingly, each party hereby consents to the issuance of injunctive relief by any court of competent jurisdiction to -10- compel performance of such party's obligations and to the granting by any court of the remedy of specific performance of its obligations hereunder. SECTION 6.11. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PURCHASER: Q.E.P. CO., INC. By: /S/ LEWIS GOULD ----------------------------------------- Lewis Gould, President SELLER: ROBERTS BEHEER B.V. By:__________________________________________ ROBERTS CONSOLIDATED INDUSTRIES, INC. By: /S/ LEWIS GOULD ----------------------------------------- Lewis Gould, President -11- EX-21 4 EXHIBIT 21 Subsidiaries of Q.E.P. Company, Inc. JURISDICTION NAME OF SUBSIDIARY OF INCORPORATION - ------------------ ---------------- Marion Tool Corporation Indiana Westpoint Foundry, Inc. Indiana Q.E.P. - O'Tool, Inc. California Roberts Consolidated Industries, Inc. Delaware Q.E.P. Holland BV Holland EX-27 5
5 YEAR FEB-28-1998 MAR-01-1997 FEB-28-1998 239,984 0 12,791,483 480,000 11,487,463 27,601,267 2,696,386 0 43,025,888 13,389,051 0 0 336,660 2,655 15,293,760 43,025,888 53,691,186 53,691,186 35,954,506 14,071,847 0 0 373,133 3,291,700 1,282,053 2,009,647 0 0 0 2,009,647 .75 .75
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