U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1996
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 No X
As of June 30, 1996 there were 2,395,680 shares of the Company's common stock
outstanding.
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<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1996
(Unaudited)
<S> <C>
ASSETS
Current Assets
Cash $ 4,240
Certificate of Deposit (Note B) 141,627
Accounts receivable from Liquidation (Note C) 672,075
Accounts receivable 551,407
Inventories 712,341
Other current assets 14,536
Total Current Assets 2,096,226
Property, plant and equipment: 855,678
Less accumulated depreciation 814,563
Net property, plant and equipment 41,115
TOTAL ASSETS $ 2,137,341
See accompanying notes
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<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30,
1996
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Bank Indebtedness $ 1,952,311
Accounts Payable 679,841
Accrued expenses 240,114
Due to related party 81,979
Total Current Liabilities 2,954,245
Long-term unsecured note payable 500,000
TOTAL LIABILITIES 3,454,245
Commitments and Contingencies (Note D)
STOCKHOLDERS' EQUITY
Preferred stock, 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) (26,209,553)
3,709,068
Less:
Treasury stock, 255,708 shares (5,025,972)
Total Stockholders Equity (deficiency) (1,316,904)
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 2,137,341
</TABLE>
See accompanying notes
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<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended For the three months ended
June 30, June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 3,624,545 $ 26,730,047 $ 1,216,460 $ 8,064,854
Cost of Goods Sold 2,471,915 25,834,887 820,777 7,672,301
Gross Profit 1,152,630 895,160 395,683 392,553
Selling, General, & Administrative Expenses 1,261,036 5,191,176 338,015 1,321,772
Operating Income (loss) (108,406) (4,296,016) 57,668 (929,219)
Other Income or (Expense)
Interest Expense (401,102) (583,824) (57,056) (207,840)
Litigation Settlements (667,029) -- (14,100) --
Litigation Judgement Expense (42,012) -- --
Other (15,175) (1,394,159) (4,960) (752,357)
Total Other Income (Expense) (1,125,318) (1,977,983) (76,116) (960,197)
Income (Loss) Before Income Taxes (1,233,724) (6,273,999) (18,448) (1,889,416)
Income Tax Expense (Benefit)
Net Income (loss) ($ 1,233,724) ($ 6,273,999) ($ 18,448) ($ 1,889,416)
Per Common Share Data:
Net income (loss) before income taxes ($ 0.58) ($ 3.18) ($ 0.01) ($ 0.96)
Net income (loss) ($ 0.58) ($ 3.18) ($ 0.01) ($ 0.96)
Weighted average used in per share calculations 2,116,514 1,971,742 2,395,680 1,976,931
</TABLE>
See accompanying notes
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<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30,
1996 1995
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) ($1,233,724) ($6,273,999)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 14,006 897,512
Provision for Bad Debts -- 228,500
Impairment reserve - assets held for sale -- 650,000
Write-off of mining claims -- 674,500
Stock Compensation 20,937 35,000
Certificates of deposit 1,505 (152,850)
Accounts receivable (63,091) (2,437,683)
Inventories 70,137 1,956,797
Other Assets (6,636) 57,431
Accounts payable (86,201) 3,612,896
Income taxes -- 141,000
Accrued expenses 39,387 322,846
Deferred rent expense -- (290,000)
Due to Related Party 81,979 --
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,166,701) (578,050)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,574) (592,797)
Proceeds from sale of assets held for sale -- 648,608
Stock acquired - asset held for sale -- (279,675)
Accounts receivable from liquidation 5,430,174 --
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,412,600 (223,864)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment to Officer (333,202) --
Net borrowings (repayments) short-term debt -- 1,261,125
Repayments - Notes Payable (4,506,807) (477,120)
Unsecured note payable issued 500,000 --
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,340,009) 784,005
NET INCREASE (DECREASE) IN CASH (89,110) (17,909)
Cash at Beginning of Period 93,350 17,909
Cash at End of Period $ 4,240 $ --
</TABLE>
See accompanying notes to condensed financial Statements
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<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
Common Additional Amounts Total
Stock Treasury Paid-In Due From Accumulated Stockholders'
Shares Amount Stock Capital Officers Deficit Equity
------ ------ ----- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1994 1,966,931 20 (5,025,972) 29,862,664 (60,103) (6,447,574) 18,329,035
Stock Issuance:
Officer severance 10,000 $35,000 35,000
Net Loss (6,273,999) (6,273,999)
AS OF JUNE 30, 1995 1,976,931 $20 ($5,025,972) $29,897,664 ($60,103) ($12,721,573) $12,090,036
</TABLE>
See accompanying notes to condensed financial statements
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<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Common Additional Total
Stock Treasury Paid-In Accumulated Stockholders'
Shares Amount Stock Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1995 1,976,931 20 (5,025,972) 29,897,664 (24,975,829) (104,117)
Stock Issuance:
Bonus 418,749 4 $20,933 20,937
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 to condensed financial statements
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<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, 1995, 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, 1996, are not necessarily indicative of the results that may be expected for
the year ended September 30, 1996.
Note B. Certificate of Deposit
A Certificate of Deposit in the amount of $141,400 provides collateral for a
Letter of Credit issued to an Insurance carrier to secure the Company's
potential obligations under its Workman's Compensation Plan. Any excess above
$141,400 represents accrued interest which is available for regular Company use.
Note C -- Account Receivable from liquidation
In late fiscal 1995, as disclosed more completely in the Company's Report on
Form 10-KSB for the year ended September 30, 1995 Technical Metals Company and
QPI Consumer Products Corporation, two of the Company's subsidiaries, were being
wound down and their assets were being liquidated.
The assets and liabilities of these subsidiaries are not included in the
Company's consolidated financial statements but rather are shown as a one line
item on the balance sheet as "accounts receivable from liquidation" at that
particular point in time.
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<PAGE>
As at June 30, 1996 the net amount receivable from liquidation and disposal was
$672,075 represented by:
Accounts Receivable 249,780
Inventory 234,557
Fixed Assets 250,000
Patents 40,443
774,780
Less:
Subordinated Secured Creditor --
SBA Loan --
Liquidation Costs 102,705
$ 672,075
Note D - Commitments and Contingencies
The Company recorded the settlement of certain litigation during the three
months ended June 30, 1996 as shown by the litigation settlement expense of
$14,100.
The Company also recorded the settlement of all litigation with a former
Director and Officer by assigning to him a note receivable which had previously
been written off as uncollectible. For further information on commitments and
contingencies please see Part II, Item I.
Note E -- 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,
1996 1995 1996 1995
Cash paid for interest $401,102 $583,824 $ 57,056 $207,840
Common Stock issued for
Officer /Employee bonuses 13,958 -- -- --
Officer Severance 6,979 35,000 -- --
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<PAGE>
Note F -- Reclassification
Certain amounts for 1995 have been reclassified to conform with the 1996
presentation.
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<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Nine Months Ended June 30, 1996 and June 30, 1995
Consolidated net sales for the nine months ended June 30, 1996 were
$3,624,545 as compared to $26,730,047 a year earlier. The decline was due to the
discontinuance of the operations of Technical Metals and QPI Consumer Products
Corporation. Comparable sales during the nine months ending June 30, 1995 at
Multipress were $3,980,941 representing a 9% decline in Multipress' sales in the
nine months ended June 30, 1996 as compared to June 30, 1995.
The gross profit for the nine month period ending June 30, 1996 was
$1,152,630, 32% of sales, as compared to $895,160, or 3% of sales during the
corresponding period in the prior year. Gross margins were higher due to the
fact that the discontinued subsidiaries had extremely low or negative margin
operations. The gross margin at Multipress was $1,152,630 for the nine months
ended June 30, 1996 as compared to $1,229,991 for the nine month period ended
June 30, 1995.
Selling, general and administrative expense were $1,261,036 or 35% of
sales for the nine month period ended June 30, 1996 as compared to $5,191,176 or
19% of sales during the nine months ended June 30, 1995. The reduction was due
to the discontinued operations as well as the reductions in corporate overhead
costs made during the period. The corresponding figure from the previous year's
period excluding, Technical Metals and QPI Consumer Products, was $1,792,847
compared with $1,261,036 for this year, a 30% decrease.
Interest expense during the period was $401,102 as compared to $583,824
for the period ended June 30, 1995. Overall bank debt levels throughout the nine
months ended June 30, 1996 were lower than during the comparable period a year
ago, having declined almost $4,500,000 during the period, resulting in lower
interest expense.
Litigation settlement expense continued to increase as management
attempted to settle lawsuits that had been brought against the Company. The
expense for the nine months was $667,029 as compared to nothing during the
comparable period last year.
The net loss for the period was $1,233,724 as compared to $6,273,999
during the period ended June 30, 1996. The decrease was due to the
discontinuance of unprofitable subsidiaries. The comparable loss for the prior
year's period was $1,146,680 if the discontinued operations' results were
excluded. The loss was higher due primarily to litigation settlement expenses
incurred during the nine months ended June 30, 1996.
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<PAGE>
Three Months Ended June 30, 1996 and June 30, 1995
Consolidated net sales for the three months ended June 30, 1996 were
$1,216,460 as compared to $8,064,854 for the same period last year. Sales
declined due to the discontinuance of Technical Metals and QPI Consumer
Product's operations. The only remaining subsidiary was Multipress. Sales for
the three months ended June 30, 1995 for Multipress alone were $1,298,162.
The Gross Profit for the three months ended June 30, 1996 was $395,683
compared with $392,553 for the three months ended June 30, 1995. Gross Margins
were 32% of sales versus 4% for the previously corresponding period. The
increase is due to the discontinuance of the unprofitable subsidiaries.
Comparable gross margins at Multipress were $395,683 or 32% of sales for the
three months ended June 30, 1996 as compared to $407,487 or 31% in 1995.
Selling, general & administrative expenses were $338,015 or 27% of
sales for the three months ended June 30, 1996 as compared to $1,321,772 or 16%
of sales for the corresponding period the prior year. The decrease in selling,
general and administrative expenses is due to the liquidation of the Company's
unprofitable operations and continued reductions in the Company's overhead.
Selling, general and administrative expenses as a percentage of sales have
fallen from 40% of sales in the first quarter of this year to 27% in this
quarter with sales remaining steady. This decrease is due to the fact that the
reduction in expenses in the liquidated subsidiaries has started to match the
reduction in sales in these subsidiaries. Legal fees continue to run at high
levels however, partly offsetting the reduction.
Interest expense was $57,056 for the three months ended June 30, 1996
as compared to $207,840 for the same period last year. The decrease is due to
the continued reduction in the Company's bank indebtedness. This rate of
decrease will slow as the funds available to reduce bank indebtedness decreases.
This decrease is due in part to the fact that most of the funds to be generated
from the liquidated subsidiaries have already been applied to reduce bank
indebtedness. Interest expense should decline to approximately $35,000 per
quarter starting October 1, 1996 (assuming current interest rates and terms
prevail) and levels after March 31, 1997 will depend on negotiations with the
Company's secured lender.
The net loss for the period was $18,448 as compared with $1,889,416.
The improvement was due to the liquidation and sale of unprofitable operations
and assets, reductions in corporate overhead costs and lower interest costs due
to lower bank debt.
Liquidity and Capital Resources
As of June 30, 1996, the Company had a working capital deficiency of $858,019 as
compared to $844,691 at March 31, 1996 and $603,750 at December 31, 1995.
Cash used in operating activities
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<PAGE>
was $1,161,701 for the period ended June 30, 1996. This was due principally to
the loss for the period of $1,233,724, the increase in accounts receivable of
$63,091 and the decrease in accounts payable of $86,201.
Under the workout agreement with the Company's secured lender, the majority of
the cash generated from the liquidation of the assets of Technical Metals and
QPI Consumer Products of 5,430,174 was used to pay the secured lender. As of
June 30, 1996, $4,506,807 had been paid to the secured lender to reduce its
debt level and an additional $333,202 had also been paid to the secured lender,
eliminating the amount due to a former officer.
Also, of the loss of $1,233,724 for the period ended June 30, 1996,
approximately $667,000 was for litigation settlement expense. Of this, $500,000
was settled by issuing a five year 6% unsecured convertible promissory note to
PI, Inc. due August 31, 2001. Similarly, $81,979 of the litigation settlement
expense was recorded for settling the contract of a former officer, and this is
to be paid over an extended period of time.
Despite the reductions in the amount owing to its secured lender, the Company
still required substantial additional funds to continue operations. To increase
the availability of funds, which are still unavailable from outside sources, the
Company continued to reduce staffing and other costs, sell additional assets and
renegotiate, extend or settle other outstanding indebtedness and obligations. No
assurances can be given that these steps will be sufficient to allow the Company
to continue operations.
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<PAGE>
PART II
Item 1. Legal Proceedings
In early 1995, two putative class action and derivative action
lawsuits (one by Bruce Daigle (who subsequently became a director of the
Company) and the other by Bruce Balch) were filed against the Company and James
Renaldo in the United States District Court for the Middle District of Florida,
Tampa Division. Both complaints alleged the Company violated federal securities
laws and Delaware law in connection with a proposed merger between the Company
and Exsorbet, Inc. which merger was subsequently abandoned and that various
publicly filed documents and press releases were misleading. In 1996, both cases
were dismissed.
In March 1995, PI, Inc., sued the Company and its former
president, James Renaldo, in the United States District Court for the Southern
District of New York for the Company's failure to register shares of restricted
stock issued to PI, Inc. in connection with a 1993 merger between the QPI
Consumer and PI, Inc.'s subsidiary PI Consumer Products Corporation. The
complaint was dismissed in December 1995 against the Company and Renaldo. In
1996, PI sued the Company on similar grounds in the United States District court
for the Middle District of Florida, Tampa Division. The action was settled in
August 1996, with the Company issuing PI a $500,000 long term 6% note, which is
convertible by PI into the Company's common stock at $.75 to $1.00 per share.
In March 1995, Howard S. Klein sued the Company in the United
States District Court, Eastern District of Pennsylvania for alleged lost profits
on Company stock he purchased from 1989-1993, plus actual losses incurred. On
October 3, 1996, the Court granted the Company summary judgment and dismissed
the case against the Company. The plaintiff has appealed to the United States
Court of Appeals for the Third Circuit. The appeal has been briefed and is
scheduled for argument in June 1997. The Company believes the plaintiff's claims
are meritless.
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 primarily that the Company (1) issued misleading
press releases in March 1994 concerning a proposed agreement between Disney and
QPI Consumer; (2) overstated the value of engineering drawings 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, entered April 1, 1997, whereby the Company neither admitted
nor denied the charges and agreed to the entry of a "cease and desist" order
that it not violate federal securities laws in the future.
During fiscal 1995, the Company moved out of its executive
offices in Tampa with a remaining lease term through June 2001 at approximately
$6,000 rent per month. The landlord sued the Company and obtained a judgment for
past and future rents. Such liability
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<PAGE>
could materially adversely effect the Company's financial condition.
During fiscal 1995, a creditor of QPI Consumer, the
Brookwood Company threatened to sue the Company for approximately $130,000 of
goods sold to QPI Consumer. Brookwood subsequently sued the Company in state
court in Tampa, Florida, and trial is scheduled for May, 1997. While the
Company believes its defenses are valid, a loss of such litigation could have a
material adverse affect upon the Company's financial condition.
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 businesses. None of
the litigation matters currently pending against the Company, standing alone,
aside from the matters specifically discussed above, is deemed to be material by
management of the Company.
Item 3. Defaults Upon Senior Securities.
As of June 30, 1996, 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 $1.952 million.
Item 6 Exhibits and Reports of Form 8-K
a). Exhibits
27.1 - Financial Data Schedule
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<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: March 31, 1997 By /s/ Bruce C. Weaver
Bruce C. Weaver
President (Principal Executive
Officer and Principal Financial
And Accounting Officer)
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,240
<SECURITIES> 141,627
<RECEIVABLES> 55,407
<ALLOWANCES> (35,000)
<INVENTORY> 712,341
<CURRENT-ASSETS> 2,096,226
<PP&E> 855,678
<DEPRECIATION> 814,583
<TOTAL-ASSETS> 2,137,341
<CURRENT-LIABILITIES> 2,954,245
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 29,918,597
<TOTAL-LIABILITY-AND-EQUITY> 2,137,341
<SALES> 3,624,545
<TOTAL-REVENUES> 3,624,545
<CGS> 2,471,915
<TOTAL-COSTS> 1,261,036
<OTHER-EXPENSES> 1,125,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 401,102
<INCOME-PRETAX> (1,233,724)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,233,724)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,233,724)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
