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 December 31, 1995
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 December 31, 1995 there were 1,976,931 shares of the Company's common
stock outstanding.
-1-
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31,
1995
(UNAUDITED)
ASSETS
Current Assets
Cash $ 261,837
Certificate of Deposit (Note B) 143,938
Accounts receivable from liquidation (Note C) 4,173,959
Accounts receivable 551,217
Inventories 732,348
Other current assets 817
-------------
Total Current Assets 5,864,116
Property, plant and equipment: 848,031
Less accumulated depreciation 804,316
-------------
Net property, plant and equipment 43,715
--------------
TOTAL ASSETS $ 5,907,831
==============
See accompanying notes
-2-
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31,
1995
(UNAUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Bank Indebtedness 5,435,239
Accounts Payable 852,396
Accrued expenses 180,211
Due to officer --
------------
Total Current Liabilities 6,467,846
------------
TOTAL LIABILITIES 6,478,846
Commitments and Contingencies (Note D)
STOCKHOLDERS' EQUITY
Preferred stock, par value $.000001
authorized 10,000,000 shares,
issued and outstanding 25 --
Common stock, $.00001 par value, authorized 20,000,000
shares, issued and outstanding 1,976,931 shares 20
Additional paid-in capital 29,897,664
Retained earnings (deficit) (25,431,727)
--------------
4,465,957
Less:
Treasury stock, 255,708 shares (5,025,972)
-------------
Total Stockholders Equity (Deficiency) (560,015)
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 5,907,831
=============
See accompanying notes
-3-
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended
December 31,
1995 1994
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales $ 1,182,388 $ 8,351,373
Cost of Goods Sold 823,213 8,199,708
--------------- ----------------
Gross Manufacturing Profit 359,175 151,665
Selling, General, & Administrative Expenses 472,038 1,666,802
--------------- ----------------
Operating Income (Loss) (112,863) (1,515,137)
Other Income or (Expense)
Interest Expense (228,989) (110,867)
Litigation Settlement Expense (66,700) --
Litigation Judgement Expense (42,012) --
Other (5,334) 1,997
--------------- ----------------
Total Other Income (Expense) (343,035) (108,870)
Income (Loss) Before Income Taxes (455,898) (1,624,007)
Net Income (Loss) ($455,898) ($1,624,007)
=============== =================
Earnings (loss) per share
Net Income(Loss) ($0.23) ($0.83)
=============== =================
Weighted average common and equivalent shares 1,976,931 1,966,931
=============== =================
</TABLE>
See accompanying notes
-4-
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
1995 1994
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) ($455,898) ($1,624,007)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation and amortization $7,242 302,179
Cash provided by (used for) current assets and liabilities:
Accounts receivable (62,901) (787,598)
Inventories 50,130 (928,212)
Other assets 7,083 49,457
Income Taxes receivables - (9,000)
Accounts payable 86,354 1,767,174
Accrued expenses (20,516) 188,018
Amounts receivable from liquidation 1,928,290 -
Certificates of deposit (806)
Cash provided for (used by) operating ---------------- --------------
activities (389,312) (1,041,989)
Cash Flows From Investing Activities:
Acquisition of subsidiary, net of cash acquired -
Purchase of machinery & equipment (1,914,980) (326,198)
---------------- --------------
Cash provided by (used for) investing activities 1,914,980 (326,198)
Cash Flows From Financing Activities:
Repayments - notes payable (1,023,979) (32,274)
Net borrowings (repayments) -short term - 1,382,552
Repayment to officer (333,202) -
--------------- ---------------
Cash provided by (used for) financing activities (1,357,181) 1,350,278
Net Increase (Decrease) in Cash 168,487 (17,909)
Cash at Beginning of Period 93,350 17,909
--------------- ---------------
Cash at End of Period $261,837 $ -
=============== ===============
</TABLE>
See accompanying notes to condensed financial Statements
-5-
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Additional Amounts Total
Common Stock Treasury Paid-In Due From Retained Stockholders'
Shares Amount Stock Capital Officers Earnings 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
Net Loss (1,624,007) (1,624,007)
---------- ------- ------------ ------------ ---------- ------------- -----------
AS OF DECEMBER 31, 1994 1,966,931 $20 ($5,025,972) $29,862,664 ($60,103) ($8,071,581) $16,705,028
========== ======= ============ ============ ========== ============= ===========
</TABLE>
See accompanying notes to condensed financial statements
-6-
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Additional Amounts Total
Common Stock Treasury Paid-In Due From Retained Stockholders'
Shares Amount Stock Capital Officers Earnings 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)
Net Loss (455,898) (455,898)
----------- ------- ----------- ------------ ---------- -------------- -----------
AS OF DECEMBER 31, 1995 1,976,931 $20 ($5,025,972) $29,897,664 ($25,431,727) ($560,015)
=========== ======== =========== =========== ========== ============== ===========
</TABLE>
See accompanying notes to condensed financial statements
-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, 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 months, ended December 31,
1995, are not necessarily indicative of the results that may be expected for the
year ended September 30, 1996.
Note B - Certificate of Deposit
The 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 May 1, 1996 and has a renewal date for
valuation purposes of November 1, 1996.
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.
-8-
<PAGE>
As at December 31, 1995 the net amount receivable from liquidation and disposal
was $4,173,959 represented by:
Accounts Receivable $3,464,617
Inventory 1,103,856
Fixed Assets 2,002,835
Patents 40,443
----------
$6,611,751
Less:
Subordinated Secured Creditor 936,000
SBA Loan 373,288
Liquidation Costs 1,128,504
----------
$4,173,959
==========
Note D - Commitments and Contingencies
During the three months ended December 31, 1995 the Company incurred two
judgments against it totaling $42,012. This has been recorded as accrued
contingent expense during the period. Additionally, the Company settled
litigation against it by certain lessors and creditors by recording settlements
during the quarter in the amount of $66,700. These amounts are to be paid over
the remainder of fiscal 1996 and in some cases the first three quarters of
fiscal 1997.
For additional information on these and other contingencies and commitments
please refer to Part II, Item 1 entitled legal proceedings.
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:
Three Months Ended
December 31,
1995 1994
---- ----
Cash paid for interest $228,989 $110,867
Common Stock issued for
Officer /Employee bonuses -- --
Note F -- Reclassification
Certain amounts for 1994 have been reclassified to conform with the 1995
presentation.
-9-
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended December 31, 1995 as Compared to December 31, 1994
By the end of the quarter ended December 31, 1995, the sole operating
subsidiary of the Company was QPI Multipress Inc. ("Multipress"), a manufacturer
of hydraulic presses. Technical Metals Company was winding down and in the
initial stages of liquidation and disposal of its assets. An involuntary
bankruptcy petition was filed against QPI Consumer Products Corporation (QPI
Consumer) on or about August 23, 1995 and QPI Consumer filed a voluntary
bankruptcy petition on October 19, 1995 in order to have an orderly liquidation
of its business.
As a result, net sales for the three months ended December 31, 1995
were $1,182,388 compared with $8,351,373 for the three months ended December 31,
1994. Gross profit was $359,125, or 30% of sales, versus $151,665, or 2% of
sales, a year earlier. Gross profit improved because of the discontinuation of
Technical Metals and QPI Consumer, as those subsidiaries generated narrow or
negative gross margins.
Selling, general and administrative expenses decreased to $472,038 for
the three months ended December 31, 1995 compared with $1,666,802 for the three
months ended December 31, 1994, due to the discontinuance of the operations of
Technical Metals and QPI Consumer. Selling, general and administrative costs
constituted 40% of sales for the period ended December 31, 1995 as compared to
20% of sales from the corresponding period in the prior year. Selling, general
and administrative expenses were a disproportionately higher percentage of sales
for the period ended December 31, 1995, because of the time lag between the
discontinuation of the operating activities and the resulting immediate drop in
sales and the elimination of the expenses. Additionally, legal fees increased
significantly as the number of lawsuits against the Company had increased
significantly, and other professional fees increased as consultants were
retained to assist the Company with the liquidations of Technical Metals and QPI
Consumer and the Company's other liquidity problems.
It is anticipated that selling, general and administrative expenses
will decrease in the ensuing quarters as the cost reductions associated with the
liquidated subsidiaries come into effect and professional and legal expenses are
reduced as problems are gradually resolved and legal proceedings are settled or
terminated. Selling, general and administrative expenses as a percentage of
sales is also expected to decrease as sales are expected to remain stable over
the next quarters while such expenses decrease.
Interest expense for the three months ended was $228,989 as compared
with $110,867 for the three months ended December 31, 1994. This increase is due
to a higher debt level than during the comparable period a year earlier as well
as a much higher interest rate and the payment of
-10-
<PAGE>
facility fees. It is expected that interest expense will decline over the next
two to three quarters as the amount of outstanding indebtedness is expected to
be reduced from the proceeds of the liquidation of Technical Metals and QPI
Consumer. During early 1996, the Company was also in negotiations with its
lender to try to reduce the interest rate being charged on the loan and the
amount of the monthly facility fee.
The net loss for the period was $455,898 as compared with $1,624,007
for the corresponding period in the prior year. The decrease is due primarily to
the discontinuation of the money losing operations of Technical Metals and QPI
Consumer.
Liquidity and Capital Resources
During the quarter, cash used in operating activities, was $389,312 as compared
to $1,041,989 of cash used for the quarter ended December 31, 1994. The use of
cash was predominantly due to the loss for the period of $455,898 and the
increase in accounts receivable of $62,901.
Very little cash was used during the quarter for investing activities other than
fixed asset purchases by QPI Multipress, Inc. totaling $13,310. The majority of
the cash generated during the quarter was from the liquidation of the two
subsidiaries totalling 1,928,250 which primarily went towards paying down the
secured lender $1,023,979 and repaying to the secured lender an amount due to
former officer James Renaldo of $333,202. This latter amount had been borrowed
by the officer from the secured creditor and the proceeds had been lent to the
Company in 1994 for its stock buyback program.
As of December 31, 1995, the Company had a working capital deficit of $603,730.
The Company had approximately $5.435 million in bank debt. In addition, the
Company had obligations under certain long-term leases with respect to real
property. A number of creditors of the discontinued subsidiaries had commenced
litigation against the Company, and certain suppliers for Multipress expressed
hesitation in continuing to extend credit to Multipress or the Company. The
Company required substantial additional funds (or an improved cash position) to
continue operations. To increase the availability of funds, the Company
anticipated that it would attempt to (i) reduce staff and overhead costs, (ii)
sell additional assets, (iii) reduce, renegotiate or otherwise extend the bank
indebtedness, and (iv) renegotiate, extend, or settle other outstanding
indebtedness or obligations. (The Company did not anticipate that other sources
of financing will be available.) No assurances can be given that these steps
will be taken or that if taken, will be sufficient to allow the Company to
continue operations.
-11-
<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 Untied 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 could materially adversely effect the
Company's financial condition.
-12-
<PAGE>
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 December 31, 1995, 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 $5.434 million.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
Exhibits
27.1. Financial Data Schedule
Reports on Form 8-K
A report on Form 8-K was filed on October 17, 1995,
reporting:
(a) Under Item 1, the bankruptcy of subsidiary QPI
Consumer Products Corporation under Chapter 11 of the
United States Bankruptcy Code, and
Under Item 5, a change in the Board of Directors of
the Company.
-13-
<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)
-14-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 261,837
<SECURITIES> 143,938
<RECEIVABLES> 4,725,176
<ALLOWANCES> (35,600)
<INVENTORY> 732,348
<CURRENT-ASSETS> 5,864,116
<PP&E> 848,031
<DEPRECIATION> 804,316
<TOTAL-ASSETS> 5,907,831
<CURRENT-LIABILITIES> 6,467,846
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 29,897,664
<TOTAL-LIABILITY-AND-EQUITY> 5,907,831
<SALES> 1,182,388
<TOTAL-REVENUES> 1,182,388
<CGS> 823,213
<TOTAL-COSTS> 472,038
<OTHER-EXPENSES> 114,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228,989
<INCOME-PRETAX> (455,898)
<INCOME-TAX> 0
<INCOME-CONTINUING> (455,898)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (455,898)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
