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, 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 December 31, 1996 there were 2,395,680 shares of the Company's common
stock outstanding.
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
December 31,
1996
----
(Unaudited)
ASSETS
Current Assets
Cash $ 196,352
Certificate of Deposit (Note B) 55,392
Accounts receivable from liquidation (Note C) 48,927
Accounts receivable 628,829
Inventories 548,028
Other current assets 57,544
-----------
Total Current Assets 1,535,072
Property, plant and equipment 852,680
Less accumulated depreciation (824,306)
-----------
Net property, plant and equipment 28,374
-----------
TOTAL ASSETS $ 1,563,446
===========
See accompanying notes
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
December 31,
1996
----
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Bank Indebtedness $ 1,378,851
Accounts Payable 1,318,072
Accrued expenses 105,905
Due to officer 50,000
-----------
Total Current Liabilities 2,852,828
Long Term Unsecured Note Payable 502,500
-----------
TOTAL LIABILITIES 3,355,328
-----------
Commitments and Contingencies (Note D)
STOCKHOLDERS' EQUITY
Preferred stock, par value $.000001
authorized 10,000,000 shares,
issued and outstanding 25 shares --
Common stock, $.00001 par value, authorized 20,000,000
shares, issued and outstanding, 2,395,080 shares 24
Additional paid-in capital 29,918,597
Retained earnings (deficit) (26,684,531)
-----------
3,234,090
Less:
Treasury stock, 255,708 shares (5,025,972)
-----------
Total Stockholders Equity (Deficiency) (1,791,882)
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 1,563,446
============
See accompanying notes
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended
December 31,
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 137,089 ($ 455,898)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization $ 4,799 $ 7,242
Cash provided by (used for) current
assets and liabilities:
Restricted Cash 86,501 (806)
Accounts receivable (27,923) (62,901)
Inventories 45,479 50,130
Other assets (42,928) 7,083
Accounts payable 127,181 86,354
Accrued expenses (23,855) (20,516)
Due to officer (25,000)
----------- -----------
Cash provided for (used by) operating
activities 281,343 (389,312)
Cash Flows From Investing Activities:
Purchase of machinery & equipment (6,300) (13,310)
Amounts receivable from liquidation 2,397 1,928,290
----------- -----------
Cash provided by (used for) investing activities (3,903) 1,914,980
Cash Flows From Financing Activities:
Repayments - notes payable (89,182) (1,023,979)
Repayment to officer -- (333,202)
----------- -----------
Cash provided by (used for) financing activities (89,182) (1,357,181)
Net Increase (Decrease) in Cash 188,258 168,487
Cash at Beginning of Period 8,094 93,350
----------- -----------
Cash at End of Period $ 196,352 $ 261,837
=========== ===========
</TABLE>
See accompanying notes to condensed financial Statements
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
For the three months ended
December 31,
1996 1995
---- ----
(Unaudited) (Unaudited)
Net Sales $1,380,637 $1,182,388
Cost of Goods Sold 870,159 823,213
----------- -----------
Gross Manufacturing Profit 510,478 359,175
Selling, General, & Administrative Expenses 327,853 472,038
----------- -----------
Operating Income (Loss) 182,625 (112,863)
Other Income or (Expense)
Interest Expense (41,290) (228,989)
Litigation Settlement Expense (66,700)
Litigation Judgment Expense (42,012)
Other (4,246) (5,334)
----------- -----------
Total Other Income (Expense) (45,536) (343,035)
Income (Loss) Before Income Taxes 137,089 (455,898)
Net Income (Loss) $137,089 ($455,898)
=========== ===========
Earnings (loss) per share
Primary $0.06 ($0.23)
=========== ===========
Fully diluted earnings per share $0.04 --
=========== ===========
Weighted average common and equivalent shares 2,395,680 1,976,931
=========== ===========
Fully diluted weighted average common and
equivalent shares 3,587,346 --
=========== ===========
See accompanying notes
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Three Months Ended December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Amounts Total
Treasury Paid-In Due From Retained Stockholders'
Shares Amount Stock Capital Officers Earnings Equity
--------- ------ ----------- ----------- --------- ------------ ---------
<S> <C> <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)
Net Loss (455,898) (455,898)
--------- ---- ----------- ----------- --------- ------------ ---------
As of Dec. 31, 1995 1,976,931 $ 20 ($5,025,972) $29,897,664 ($25,431,727) ($560,015)
========= ==== =========== =========== ========= ============ =========
</TABLE>
See accompanying notes
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Three Months Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Total
Treasury Paid-In Retained Stockholders'
Shares Amount Stock Capital Earnings Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <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 Profit 137,089 137,089
------------ ------------ ------------ ------------ ------------ ------------
As of Dec. 31, 1996 2,395,680 $24 ($5,025,972) $29,918,597 ($26,684,531) ($1,791,882)
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED 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 months ended December 31,
1996, are not necessarily indicative of the results that may be expected for the
year ended September 30, 1997.
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 November 30, 1997. During the quarter,
$46,287 was drawn on the Letter of Credit to pay past due obligations, $39,843
was used to reduce bank indebtedness and $55,000 was renewed until November 30,
1997.
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.
<PAGE>
As at December 31, 1996 the net amount receivable from liquidation and disposal
was $48,927 represented by:
Accounts Receivable $48,927
Less:
Subordinated Secured Creditor
SBA Loan
Liquidation Costs
-------
$48,927
=======
Note D -- Commitments and Contingencies
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,
1996 1995
------- --------
Cash paid for interest $41,290 $228,989
Common Stock issued for
Officer /Employee bonuses -- --
Note F -- Reclassification
Certain amounts for 1996 have been reclassified to conform with the 1995
presentation.
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended December 31, 1996 as Compared to December 31, 1995
Net Sales for the three months ended December 31, 1996 were $1,380,637 as
compared to $1,182,388 for the three months ended December 31, 1995 an increase
of 16.8%. Gross profit was $510,478 or 37% of sales for the period ended
December 31, 1996 compared to $359,175 or 30% of sales for the same period a
year earlier. Sales increased due to the addition of another salesperson, a new
marketing executive and the commencement of a modest marketing program during
this period. Gross profit increased due to improved operating efficiencies as
Multipress increased its volume closer to capacity.
Selling, general and administrative expenses decreased from $472,038 during the
three months ended December 31, 1995 to $327,853 for the three months ended
December 31, 1996. Selling general and administrative expenses as a percentage
of sales were 23.7% during the three months ended December 31, 1996 as compared
to 40% for the three months ended December 31, 1995, a decrease of 40%. Selling,
general and administrative expenses declined as cost reductions put into place
last year began to take effect and legal expenses started to decline. As a
percentage of sales, selling, general and administrative expenses also declined
due to the increase in sales over the corresponding period in the prior year.
Some of the cost reductions and eliminations from last year were offset slightly
by the addition of some personnel at QPI Multipress. It is expected that
selling, general and administrative expenses will decline slightly for the
balance of fiscal 1997.
Interest expense for the three months ended December 31, 1996 was $41,290 as
compared to $228,989 for the three months ended December 31, 1995. The decrease
is due to the reduction in bank indebtedness during the last year and the lower
interest rate being charged on that indebtedness. The reduction in bank interest
was slightly offset by the addition of interest payable of $7500 per quarter on
the 6% convertible promissory note issued to PI, Inc. on August 31, 1996. It is
expected that interest will remain steady or slightly decrease as reductions in
bank indebtedness are less significant during this fiscal year.
Net income for the period was $137,089 or $0.06 per share as compared to a loss
of $455,898 or $0.23 per share a year earlier. The improvement is due to the
increase in sales for the period and the reduction in selling, general and
administrative, interest and litigation related expenses during the period.
<PAGE>
Liquidity and Capital Resources
As at December 31, 1996 the Company had a working capital deficiency of
$1,317,756 as compared to $1,453,344 at September 30, 1996 and a working capital
deficiency of $603,703 at December 31, 1995. The decrease in the deficiency
during the quarter is due to profitable operations during the quarter and the
use of cash to reduce bank indebtedness. The company anticipates that this
deficiency will continue to decline as accounts payable and other obligations
are settled and could further decline if profitable operations can be sustained.
During the period ended December 31, 1996 cash generated from operating
activities was $281,343 as compared to cash used in operating activities of
$389,312 in the corresponding period last year. Cash generated during the three
month period ended December 31, 1996 came predominately from earnings for the
quarter of $137,089 and the redemption of the Company's certificate of deposit
in the amount of $86,501. Other working capital items that increased or
decreased during the quarter generally offset each other.
The Company's financial condition prevented it from carrying out any significant
investing activities during the three months ended December 31, 1996. The net
amount received from the liquidation of QPI Consumer Products which is now
essentially complete was and will in the future be insignificant. Cash flows
from investing activities in the corresponding period last year were $1,914,980
due to the large amounts collected from the liquidation of the assets of QPI
Consumer Products and Technical Metals carried out during fiscal 1996.
The majority of any excess funds generated continues to be applied to reduce the
Company's bank indebtedness. During the quarter the Company's short term loan of
$41,000 was paid off and the Company's note payable, which is due on demand, was
reduced by $48,182.
The Company continues to operate under a workout agreement with its secured
lender and the Company's bank indebtedness owing to that secured lender
continues to be due on demand. Despite the fact the Company had a profitable
quarter the Company still requires additional funds to continue operations. No
assurances can be given that such funds will be available. Meanwhile the Company
is continuing to try to improve profitability and cash flow and extend, settle
or repay all outstanding liabilities and obligations.
<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 primarily 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 in
financial statements contained in periodic SEC reports; and (3) failed to file
periodic reports since the quarter ended June 30, 1995. The SEC settled 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 of approximately $162,000, in 1997. Such judgment has a material adverse
effect on the Company's financial condition.
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 the full amount plus statutory interest from December 1995 for a total of
approximately $170,000 to the date of judgment. The Company intends to appeal,
but no assurance can be given that such appeal will be successful. Such judgment
has a material adverse effect on 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 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.
<PAGE>
Item 3. Default Upon Senior Securities
As of December 31, 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 $1,378,000.
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
<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: July ___, 1997 By /s/ Bruce C. Weaver
----------------------------
Bruce C. Weaver
President (Principal Executive
Officer and Principal Financial
And Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 251,744
<SECURITIES> 0
<RECEIVABLES> 628,829
<ALLOWANCES> 0
<INVENTORY> 548,028
<CURRENT-ASSETS> 1,535,072
<PP&E> 852,680
<DEPRECIATION> 824,306
<TOTAL-ASSETS> 1,563,446
<CURRENT-LIABILITIES> 2,852,828
<BONDS> 502,500
0
0
<COMMON> 24
<OTHER-SE> (1,791,906)
<TOTAL-LIABILITY-AND-EQUITY> 1,563,446
<SALES> 1,380,637
<TOTAL-REVENUES> 1,380,637
<CGS> 870,159
<TOTAL-COSTS> 870,159
<OTHER-EXPENSES> 332,099
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,290
<INCOME-PRETAX> 137,089
<INCOME-TAX> 0
<INCOME-CONTINUING> 137,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,089
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.04
</TABLE>
