U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1997
0-18145
Commission file number
QUALITY PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2273221
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
560 Dublin Avenue, Columbus, OH 43215
(Address of principal executive offices)
(614) 228-8120
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
(1) Yes__X__ No_____
As of June 30, 1997 there were 2,395,680 shares of the Company's common stock
outstanding.
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
June 30,
1997
-----------
(Unaudited)
Current Assets
Cash $ 500,782
Certificate of Deposit (Note B) 40,739
Accounts receivable 817,162
Inventories 641,038
Other current assets 19,532
-----------
Total Current Assets 2,019,253
Property, plant and equipment 838,807
Less accumulated depreciation (806,133)
-----------
Net property, plant and equipment 32,654
-----------
TOTAL ASSETS $ 2,051,907
===========
See accompanying notes
2
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
June 30,
1997
-----------
(Unaudited)
Current Liabilities
Bank indebtedness 1,275,000
Accounts payable 1,197,479
Accrued expenses 118,387
Due to related party 28,000
------------
Total Current Liabilities 2,618,866
Long-term unsecured note payable 502,500
------------
Total Long-term Liabilities 502,500
------------
TOTAL LIABILITIES 3,121,366
Commitments and Contingencies (Note C)
STOCKHOLDERS' EQUITY
Preferredstock, convertible, voting,
par value $.00001, authorized
10,000,000 shares, issued and
outstanding 25
Common stock, $.00001 par value,
authorized 20,000,000 shares,
issued and outstanding,
2,395,680 shares 24
Additional paid-in capital 29,918,597
Retained earnings (deficit) (25,962,108)
------------
3,956,513
Less:
Treasury stock, 255,708 shares (5,025,972)
------------
Total Stockholders Equity (deficiency) (1,069,459)
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 2,051,907
============
See accompanying notes
3
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the nine months ended For the three months ended
June 30 June 30
-------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 4,864,011 $ 3,624,545 $ 1,730,069 $ 1,216,460
Cost of Goods Sold 3,036,733 2,471,915 1,082,336 820,777
----------- ----------- ----------- -----------
Gross Profit 1,827,278 1,152,630 647,733 395,683
Selling, General, &
Administrative Expenses 919,860 1,261,036 308,036 339,015
----------- ----------- ----------- -----------
Operating Income (loss) 907,418 (108,406) 339,697 56,668
Other Income or (Expense)
Interest Expense (117,776) (401,102) (37,930) (57,056)
Litigation Settlements -- (667,029) -- (14,100)
Accrued Contingent
Expense -- (42,012) -- --
Other (11,064) (15,175) (2,283) (4,960)
----------- ----------- ----------- -----------
Total Other Income (128,840) (1,125,318) (40,213) (76,116)
(Expense)
Income (Loss) Before 778,578 (1,233,724) 299,484 (18,448)
Extraordinary Item
Extraordinary Item 80,934 -- -- --
Net Income (loss) $ 859,512 ($1,233,724) $ 299,484 ($ 18,448)
=========== =========== =========== ===========
Per Common Share Data:
Net income (Loss) Before
Extraordinary Item $ 0.33 ($ 0.58) $ 0.13 ($ 0.01)
----------- ----------- ----------- -----------
Net Income (loss) - primary $ 0.36 ($ 0.58) $ 0.13 ($ 0.01)
- fully diluted $ 0.24 -- $ 0.08 --
=========== =========== =========== ===========
Weighted average used
in per share calculations
- primary 2,395,680 2,116,514 2,395,680 2,395,680
- fully diluted 3,587,346 -- 3,587,746 --
=========== =========== =========== ===========
</TABLE>
See accompanying notes
4
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended
June 30,
--------------------------
1997 1996
---- ----
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net Income (Loss) $ 859,512 ($1,233,724)
Adjustments to reconcile net income
(loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization 11,064 14,006
Stock compensation -- 20,937
Restricted cash 101,154 1,505
Accounts receivable (164,932) (63,091)
Inventories (47,531) (70,137)
Other assets (4,916) (6,636)
Accounts payable 156,588 (86,201)
Accrued expenses (163,873) 39,387
Due to related party (47,000) 81,979
Accounts receivable from liquidation -- 5,430,174
----------- -----------
Cash provided by (used in)operating
activities 700,066 4,268,473
Cash Flows From Investing Activities:
Capital expenditures (16,845) (17,574)
----------- -----------
Net Cash provided by (used in) investing
activities (16,845) (17,574)
Cash Flows From Financing Activities:
Repayments to Officer -- (333,202)
Repayments - Notes payable (193,033) (4,506,807)
Unsecured note payable issued 2,500 500,000
----------- -----------
Cash provided by (used in) financing
activities (190,533) (4,340,009)
Net increase (decrease) in cash 492,688 (89,110)
Cash at Beginning of Period 8,094 93,350
----------- -----------
Cash at End of Period $ 500,782 $ 4,240
=========== ===========
See accompanying notes
5
<PAGE>
<TABLE>
<CAPTION>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Nine Months Ended June 30, 1996
Additional Total
Common Stock Treasury Paid-In Accumulated Stockholders'
Shares Amount Stock Capital Deficit Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As of Sept. 30, 1995 1,976,931 $ 20 ($ 5,025,972) $ 29,897,664 ($24,975,829) ($ 104,117)
Stock Issuance:
Bonus 279,166 3 13,955 13,958
Severance 139,583 1 6,978 6,979
Net Loss (1,233,724) (1,233,724)
------------ ------------ ------------ ------------ ------------ ------------
As of June 30,1996 2,395,680 $ 24 ($ 5,025,972) $ 29,918,597 ($26,209,553) ($ 1,316,904)
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes
6
<PAGE>
<TABLE>
<CAPTION>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Nine Months Ended June 30, 1996
Additional Total
Common Stock Treasury Paid-In Accumulated Stockholders'
Shares Amount Stock Capital Deficit Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As of Sept. 30, 1996 2,395,680 $ 24 ($ 5,025,972) $ 29,918,597 ($26,821,620) ($ 1,928,971)
Net Income (Loss) 859,512 859,512
------------ ------------ ------------ ------------ ------------ ------------
As of June 30, 1997 2,395,680 $ 24 ($ 5,025,972) $ 29,918,597 ($25,962,108) ($ 1,069,459)
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes
7
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note A -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are
presented in accordance with the requirements for Form 10-QSB and consequently
do not include all the disclosures normally required by generally accepted
accounting principles. Reference should be made to the Quality Products, Inc.
(the "Company") Form 10-KSB for the year ended September 30, 1996, for
additional disclosures including a summary of the Company's accounting policies,
which have not significantly changed.
The information furnished reflects all adjustments (all of which were of a
normal recurring nature) which are, in the opinion of management, necessary to
fairly present the financial position, results of operations, and cash flows on
a consistent basis. Operating results for the three and nine months ended June
30, 1997, are not necessarily indicative of the results that may be expected for
the year ending September 30, 1997.
Note B - Certificate of Deposit
A Certificate of Deposit is held at the Company's bank as collateral for the
Letter of Credit securing the Company's potential obligations for its Worker's
Compensation policy. The policy expires November 30, 1997. During the quarter
ended June 30, 1997, $59,287 was drawn on the Letter of Credit to pay past due
obligations, $39,843 was used to reduce bank indebtedness and $42,000 was
renewed until November 30, 1997.
Note C - Commitments and Contingencies
For further information on commitments and contingencies, please refer to
Part II, Item 1 entitled Legal Proceedings.
Note D - Cash Flow Information
The Company's non-cash investing and financing activities and cash payments
for interest and income taxes were as follows:
Nine Months Ended Three Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Cash paid for interest $117,776 $401,102 $ 37,930 $ 57,056
Common Stock issued for
Officer /Employee bonuses $ 13,958 -- --
Officer Severance $ 6,979 -- --
8
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three and Nine Months Ended June 30, 1997 compared to
Three and Nine Months Ended June 30, 1996
Consolidated net sales for the three and nine months ended June 30, 1997
were $1,730,069 and $4,864,001, respectively, as compared to $1,216,460 and
$3,624,545 for the corresponding periods in the prior year. The increase in
sales of 42% and 30%, in the current three and nine month periods, is due to the
hiring of an additional sales person, the hiring of a new marketing executive
and the addition of new, more active manufacturing representatives in certain
territories in the United States. As the Company's financial condition has
improved slightly, it has also been able to commence a modest marketing program.
Gross profit was $647,733, or 37% of sales for the three months ended June
30, 1997 and $1,827,278, or 37% of sales for the nine months ended June 30, 1997
as compared to $395,683, or 32% of sales for the three months ended June 30,
1996 and $1,152,630, or 32% of sales for the nine months ended June 30, 1996.
Gross profit increased on an absolute basis and as a percentage of sales because
of the increase in sales, reductions in costs of materials and plant
efficiencies.
Selling, general and administrative expenses ("SG&A") were $308,036 and
$919,860 for the three and nine months ended June 30, 1997 compared with
$339,015 and $1,261,036 for the corresponding periods in the prior year. SG&A
was 17.8% and 18.9% of sales during the three and nine months ended June 30,
1997 compared to 27.9% and 34.8% during the corresponding periods in the prior
year. These costs decreased on an absolute and percentage basis during the
current three and nine month periods due to the increase in sales and overhead
reductions including the closing of Company offices, terminating leases, and
reducing personnel. Furthermore, legal and accounting expenses declined
substantially from the corresponding periods in the prior year as the Company
resolved a significant number of the legal proceedings in which it was involved.
Selling, general and administrative expenses increased slightly in the third
quarter over the second quarter as the Company's lender charged the Company in
the third quarter approximately $49,448 in legal fees that had accrued over the
period of the loan.
Interest expense was $37,930 and $117,766 for the three and nine months
ended June 30, 1997, respectively, compared with $57,056 and $401,102 for the
corresponding periods in the prior year. The decrease is due to the substantial
reduction in bank indebtedness and the reduction in the interest rate charged on
the bank indebtedness. Offsetting this decrease was the interest of $22,500 paid
during the nine months ended June 30, 1997 to PI, Inc. resulting from the
issuance of a five year $500,000 6% convertible promissory note during the last
half of fiscal 1996. No such interest was paid during the corresponding periods
in the prior year.
The Company did not incur any litigation settlement expense during the
three and nine months ended June 30, 1997 compared to $14,100 and $667,029 of
such expenses incurred during the corresponding three and nine month periods in
the prior year. The significant decline is due to the fact that substantially
all of the litigation brought against the Company had been settled or otherwise
recorded on the financial statements of the Company during the corresponding
periods in the prior year. The Company has outstanding judgments against it,
including two judgments
9
<PAGE>
aggregating approximately $375,000. The Company's inability to reduce or settle
these judgments will have a materially adverse effect on the Company's financial
condition.
Net income for the nine months ended June 30, 1997 was $859,512, including
an $80,934 extraordinary gain on the sale of shares previously written off.
Income (loss) before extraordinary item during the three and nine months ended
June 30, 1997 was $299,484 and $778,578, respectively compared with losses of
$18,448 and $1,233,724, respectively, during the corresponding periods in the
prior year. This increase in income is due to the increase in sales during these
periods, and the significant reduction in all major expenses.
Liquidity and Capital Resources
As of June 30, 1997, the Company had a working capital deficiency of
$599,013 as compared to working capital deficiencies of $889,720, $1,187,758 and
$1,455,044 at March 31, 1997, December 31, 1996 and September 30, 1996,
respectively.
Cash generated from operations during the nine months ended June 30, 1997
was $700,066 resulting primarily from net income generated during the period of
$859,512 offset by the net reduction in accrued expenses during the period.
Cash is used by the Company, first, to reduce its indebtedness to its
secured lender and second, to reduce via settlement or otherwise non-trade
unsecured accounts payable and other obligations which were not incurred in
connection with the Company's current operating activities. Secured debt was
reduced by approximately $193,000 (exclusive of approximately $49,000 in lender
legal fees also paid during the period) and accounts payable and accrued
expenses, other than Multipress accounts payable, were reduced substantially
during the period.
Management continues to focus on the steps needed to continue to operate
the Company as a going concern. The Company is attempting to increase the sales
and net income of Multipress, reduce secured bank indebtedness, settle and
eliminate other obligations and resolve the remaining legal proceedings.
Although the Company's financial condition has improved, no assurance can be
given that improvements will continue.
In August 1997, the Company entered into a letter of intent with a
broker-dealer to sell in a private placement $1,500,000 of secured debt, to be
secured by all of the Company's assets, with the proceeds being used primarily
to replace the Company's existing secured debt. The noteholders and placement
agent would also receive warrants to purchase up to 660,000 shares of the
Company's common stock. The Company would also grant a security interest in all
of its assets to the broker-dealer for a previously unsecured $500,000 note
which the broker-dealer purchased in August 1997 from the noteholder. The letter
of intent is non-binding, and no assurance can be given that the financing
contemplated thereby will be consummated.
10
<PAGE>
PART II
Item 1. Legal Proceedings
In March 1995, Howard S. Klein sued the Company in the United States
District Court, Eastern District of Pennsylvania for alleged lost profits of
approximately $500,000 on Company stock he purchased from 1989-1993, plus actual
losses incurred of approximately $50,000. On October 3, 1996, the Court granted
the Company summary judgment and dismissed the case against the Company. The
plaintiff appealed to the United States Court of Appeals for the Third Circuit,
and in June 1997, the Court of Appeals affirmed the judgment in the Company's
favor.
The SEC notified the Company of an investigation in 1994. In November 1996,
the SEC filed an administrative action against the Company (SEC Case No.
3-9186), charging that the Company (1) issued misleading press releases in March
1994 concerning a proposed agreement between Disney and QPI Consumer Products
Corporation; (2) overstated the value of engineering drawings of QPI Multipress
in financial statements contained in periodic SEC reports; and (3) failed to
file periodic reports since the quarter ended June 30, 1995. The SEC and the
Company settled all charges against the Company, without payment of any money by
the Company, by a consent decree whereby the Company neither admitted nor denied
the charges and agreed not to violate federal securities laws in the future.
A supplier for QPI Consumer, the Brookwood Companies sued the Company in
December 1995 in Hillsborough County Court in Tampa, Florida, for approximately
$150,000 for goods sold for use by QPI Consumer. The trial took place in May,
1997, and in June 1997, the Court awarded Brookwood judgment against the Company
for approximately $146,000 plus statutory interest from December 1995. In August
1997, the Company reached an agreement to settle the judgment.
Various legal actions and proceedings are pending or are threatened against
the Company and its subsidiaries. These actions and proceedings arise in the
ordinary course of the Company's business. None of the litigation matters
currently pending against the Company, aside from the matters specifically
discussed above, is deemed material by management of the Company.
Item 3. Defaults Upon Senior Securities.
As of June 30, 1997, the Company was in default with respect to, among
other things, the financial covenants with respect to its bank indebtedness. The
aggregate amount of such indebtedness, all of which matured upon default, was
approximately $1.275 million.
11
<PAGE>
Item 6 - Exhibits and Reports of Form 8-k
a). Exhibits
27.1 - Financial Data Schedule
b). Reports on Form 8-K
Not Applicable
12
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Quality Products, Inc.
Registrant
Date: August 11, 1997 By: /s/Bruce C. Weaver
-----------------------
Bruce C. Weaver
President (Principal Executive
Officer and Principal Financial
And Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-START> Oct-01-1996
<PERIOD-END> Jun-30-1997
<CASH> 541,521
<SECURITIES> 0
<RECEIVABLES> 828,694
<ALLOWANCES> (11,532)
<INVENTORY> 641,038
<CURRENT-ASSETS> 2,019,253
<PP&E> 838,807
<DEPRECIATION> (806,133)
<TOTAL-ASSETS> 2,051,907
<CURRENT-LIABILITIES> 2,618,866
<BONDS> 502,500
0
0
<COMMON> 24
<OTHER-SE> (1,069,483)
<TOTAL-LIABILITY-AND-EQUITY> 2,051,907
<SALES> 4,864,011
<TOTAL-REVENUES> 4,864,011
<CGS> 3,036,733
<TOTAL-COSTS> 3,036,733
<OTHER-EXPENSES> 930,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,776
<INCOME-PRETAX> 778,578
<INCOME-TAX> 0
<INCOME-CONTINUING> 778,578
<DISCONTINUED> 0
<EXTRAORDINARY> 80,934
<CHANGES> 0
<NET-INCOME> 859,512
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.24
</TABLE>
