<PAGE>
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, 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.
(I) Yes /X/ No / /
As of December 31, 1997, there were 2,554,054 shares of the Company's
common stock outstanding.
<PAGE>
<TABLE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
<CAPTION>
December 31, 1997
(Unaudited)
<S> <C>
ASSETS
Current Assets
Cash $ 403,987
Restricted Cash 15,404
Accounts Receivable, Net 775,650
Inventories 882,000
Other Current Assets 160,867
----------
Total Current Assets $2,237,908
Property, Plant and Equipment 846,127
Less Accumulated Depreciation (812,189)
----------
Net Property, Plant and Equipment $ 33,938
Other Assets 4,320
TOTAL ASSETS $2,276,166
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
<TABLE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - Continued
<CAPTION>
December 31, 1997
(Unaudited)
<S> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Note payable, short term portion $ 200,000
Accounts payable 593,273
Accrued expenses 197,152
Customer deposits 218,213
Income Taxes payable 34,049
------------
Total Current Liabilities $ 1,242,687
NON-CURRENT LIABILITIES:
Notes payable, non-current $ 1,250,000
Notes payable, related parties, non-current 400,000
------------
Total non-current liabilities $ 1,650,000
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDER'S DEFICIT:
Preferred stock, convertible, voting, par
Value $.00001; 10,000,000 shares
authorized; 1 share issued and
outstanding
Common stock, $.00001 par value; 20,000,000 $ 25
shares authorized; 2,554,054 shares
issued and outstanding; 1,033,333
shares reserved
Additional paid in capital $ 30,053,325
Accumulated deficit (25,643,899)
Less: Treasury stock, 176,775 shares at
cost (5,025,972)
------------
Total stockholders' deficit $ (616,521)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,276,166
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
<TABLE>
QUALITY PRODUCTS, INC.
CONSOLIDATED
STATEMENT OF INCOME
<CAPTION>
For the three months ended
December 31,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales $1,731,415 $1,380,637
Cost of Goods Sold 1,135,536 870,159
---------- ----------
Gross Manufacturing Profit 595,879 510,478
Selling, General, & Administrative
Expenses 392,322 327,853
---------- ----------
Operating Income 203,557 182,625
Other Expense
Interest Expense (28,646) (41,290)
Other (817) (4,246)
---------- ----------
Total Other Expense (29,463) (45,536)
Income Before Income Taxes 174,094 137,089
Income Taxes 6,049 -
---------- ----------
Net Income 168,045 137,089
Earnings per share:
Basic earnings per common share
(Note 5) $ 0.07 $ 0.06
Diluted earnings per common share
(Note 5) $ 0.06 $ 0.05
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
<TABLE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
For the three months ended
December 31,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 168,045 $ 137,089
Adjustments to reconcile net income
to net cash provided by (used by)
operating activities;
Depreciation and amortization 3,311 4,799
Cash provided by (used for) current
assets and liabilities:
Restricted Cash 26,832 86,501
Accounts receivable (73,055) (27,923)
Inventories (73,683) 45,479
Other assets (137,641) (42,928)
Accounts payable 223,257 127,181
Accrued expenses (265,650) (23,855)
Customer Deposits (43,828) -
Income Taxes Payable 6,049 -
Due to officer - (25,000)
---------- ----------
Cash provided by (used by) operating
activities (166,363) 281,343
Cash flows From Investing Activities:
Purchase of machinery & equipment (1,274) (6,300)
Amounts receivable from liquidation - 2,397
---------- ----------
Cash used by investing activities (1,274) (3,903)
Cash Flows From Financing Activities:
Repayments - notes payable (135,000) (89,182)
Issuance of Debentures 1,530,000 -
Repayment - Debentures (50,000) -
Repayment - Bank Line of Credit (1,180,000) -
---------- ----------
Cash provided by (used for) financing
activities 165,000 (89,182)
Net Increase (Decrease) in Cash (2,637) 188,258
Cash at Beginning of Period 406,624 8,094
---------- ----------
Cash at End of Period $ 403,987 $ 196,352
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
Cash Flow Information - continued
<TABLE>
The Company's non-cash investing and financing activities and cash
payments for interest and income taxes were as follows:
<CAPTION>
Three Months Ended
December 31,
1997 1996
<S> <C> <C>
Cash paid for interest $30,373 $41,290
Cash paid for taxes - -
</TABLE>
<PAGE>
QUALITY PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements for Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they 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, 1997, 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, in the opinion of management, are
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, 1997, are not necessarily
indicative of the results that may be expected for the year ended
September 30, 1998.
2. Restricted Cash
The Restricted Cash is held at the Company's bank as collateral for a
Letter of Credit securing the Company's potential obligations for its
Worker's Compensation insurance policy. The policy expires November
30, 1998. During the quarter, $27,236 was used to reduce bank
indebtedness and $15,000 was renewed until November 30, 1998 to secure
any remaining potential workers compensation obligations.
3. Inventories
<TABLE>
<CAPTION>
Inventories at December 31, 1997 consist of:
<S> <C>
Raw materials and supplies $ 472,440
Work-in-process 333,829
Finished goods 79,549
Reserve for obsolescence (3,818)
---------
Total $ 882,000
</TABLE>
<PAGE>
4. Commitments and Contingencies
In November 1993, the Company and its Multipress subsidiary were sued
in Indiana Superior Court by an employee of a company that had
purchased one of the Company's presses from a 3rd party. The
plaintiff seeks unspecified monetary damages for a personal injury
that occurred in her employer's facility. Although the Company's
subsidiary carries full product liability insurance, the Company's
former management did not notify the insurance carrier within the
prescribed time period. Accordingly, this claim is not covered by
insurance. Based upon consultation with the Company's counsel, the
Company does not believe that the litigation will have a material
adverse affect on the consolidated financial position, results of
operations or cash flows of the Company. The company has made a
provision for the estimated potential loss on this matter.
5. Earnings Per Share
On December 31, 1997, the Company adopted Financial Accounting
Statement No. 128 issued by the Financial Accounting Standards Board.
Under Statement 128, the Company was required to change the method
previously used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings
per share, the dilutive effect of stock options are excluded. The
impact of Statement 128 on the calculation of earnings per share is as
follows:
<TABLE>
<CAPTION>
3 Months Ended December 31:
1997 1996
<S> <C> <C>
BASIC:
Average Shares Outstanding 2,554,033 2,395,680
Income From Operations $ 203,557 $ 182,625
Basic Earnings Per Share (FAS 128) $ 0.08 $ 0.08
Net Income $ 168,045 $ 137,089
Basic Earnings Per Share (FAS 128) $ 0.07 $ 0.06
Primary Earnings Per Share, As
Previously Reported (APB 15) N.A. $ 0.06
</TABLE>
<PAGE>
Note 5 - continued
<TABLE>
<CAPTION>
3 Months Ended December 31:
1997 1996
<S> <C> <C>
DILUTED:
Average Shares Outstanding 2,554,033 2,395,680
Net Effect of Dilutive
Stock options and warrants
based on the treasury stock
method using average market price 248,888 197,826
Total Shares 2,802,921 2,593,506
Income From Operations $ 203,557 $ 182,625
Diluted Earnings Per Share (FAS 128) $ 0.07 $ 0.07
Net Income $ 168,045 $ 137,089
Diluted Earnings Per Share (FAS 128) $ 0.06 $ 0.05
Fully Diluted Earnings Per Share, As
Previously Reported (APB 15) N.A. $ 0.04
Average Market Price of Common Stock $ 1.32 $ 0.23
Ending Market Price of Common Stock $ 1.06 $ 0.18
</TABLE>
The following securities were excluded from the calculation of diluted
earnings per share at December 31, 1997 because they are considered
anti-dilutive under FAS 128:
1) Options granted to company officers and directors to purchase
100,000 shares of the Company's common stock at $2.00 per share.
2) Warrants issued pursuant to the Company's debentures to purchase
465,000 shares of common stock @ $2.00 per share.
<PAGE>
6. Private Placement Debt
On November 25, 1997, the Company consummated a private placement
offering of 30 units of Company debentures in the amount of
$1,530,000. Each unit represents: a) a $50,000 interest in a 6%
$1,500,000 note payable, b) a warrant to purchase 10,000 shares of
the Company's common stock at $1 per share during the period November
1, 1997 through September 30, 1999, and c) a warrant to purchase
15,000 shares of the Company's common stock at $2 per share during the
period October 1, 1999 through September 30, 2001. The Company
incurred expenses of approximately $150,000 in connection with this
offering. The Company utilized the proceeds of the offering to repay
the bank line of credit, a $135,000 note payable and expenses
associated with the offering.
<TABLE>
Schedule of required future annual principal payments:
<CAPTION>
Fiscal Year Ended
September 30
<S> <C>
1998 $ 150,000
1999 $ 200,000
2000 $ 200,000
2001 $ 900,000
----------
TOTAL $1,450,000
</TABLE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended December 31, 1997 as Compared to December 31, 1996
Net Sales for the three months ended December 31, 1997 were $1,731,415
as compared to $1,380,637 for the three months ended December 31,
1996, an increase of $350,778 or 25.4%. Gross profit was $595,879 or
34% of sales as compared to $510,478 or 37% of sales for the same
period a year earlier. Sales increased due to increased sales and
marketing efforts during the past year and the improved performance
from manufacturers representatives in certain territories. Gross
profit decreased as a percentage of sales due to slight increases in
material costs and labor costs.
Selling, general and administrative expenses increased from $327,853
during the three months ended December 31, 1996 to $392,322 for the
three months ended December 31, 1997. Selling general and
administrative expenses as a percentage of sales were 22.7% during the
three months ended December 31, 1997 as compared to 23.7% for the
three months ended December 31, 1996. Selling, general and
administrative costs increased due to one time payments and accruals
during the quarter and the increase in sales by outside
representatives which meant higher commission costs during the period
as compared to the previous year. The one time payments and accruals
included $10,000 paid as a hiring bonus to Multipress's new President
and $20,000 towards the repricing of the Company's President and Chief
Financial Officer's stock options from $0.10 to 1.00.
Previously, the President and Chief Financial Officer had agreed to
convert their respective 175,000 stock options exercisable at $.10 to
$1.00 in exchange for certain cash payments and an additional 50,000
stock options exercisable at $2.00. The balance of the cash payments
or $27,500 payable to the Company's President and $37,424 payable to
the Company's Chief Financial Officer will be accrued during the
second quarter, and if cash resources permit, paid out by February 28,
1998. This will result in further one time charges against earnings
in the second quarter of $64,924 thereby reducing earnings lower than
what would otherwise be expected in the second quarter. By agreeing
to this concession, the Directors have shown their confidence in the
future of the Company and despite the fact the options were granted
when there was no market for the Company's shares two years ago,
ensures all outstanding stock options are more fairly priced.
Interest expense for the three months of $34,048 was offset by $5,042
of interest revenue for a net interest expense of $28,646 for the
three months ended December 31, 1997 as compared to $41,290 for the
comparable period a year earlier. The decrease is due primarily to
<PAGE>
the reduction of the interest rate on the Company's outstanding
indebtedness. The Company currently has $1,850,000 of 6% debt which
will reduce by a minimum of $50,000 per quarter and currently earns
market rates on its cash reserves. This should lead to a lower
interest expense in the foreseeable future.
Net income for the period was $168,045 as compared to $137,089 for the
same three month period a year earlier, an increase of $30,956 or
22.6%. Although sales increased during the first quarter this year as
compared to last year, increases in cost of sales and selling, general
and administrative costs increased over last year thereby reducing the
relatively higher income that would have been expected with higher
sales.
Income tax provision in the 3 months ended December 31, 1997 and 1996
includes a benefit related to utilization of NOL carry forwards of
approximately $28,000,000. The 1997 provision relates to the
company's city income taxes.
Liquidity and Capital Resources
As of December 31, 1997, the Company had a working capital surplus of
$995,221 as compared to a working capital deficiency of $1,317,756 at
December 31, 1996 and a working capital deficiency of $459,977 at
September 30, 1997. The change from a working deficit to a working
capital surplus is due to the profitable operations of the Company and
more importantly, the refinancing of the Company's outstanding bank
indebtedness. At September 30, 1997 and in previous quarters, the
Company's bank indebtedness had been due on demand and accordingly
shown in current liabilities, thereby increasing the Company's working
capital deficiency. On November 25, 1997, the Company completed a
$1,530,000 financing consisting primarily of a $1,500,000 three year
loan. This loan, except for the current portion of $200,000, is
disclosed in long term liabilities and accordingly results in a better
working capital balance.
This surplus should continue to increase as the Company anticipates
profitable operations at least through the foreseeable future. The
Company's major source of liquidity continues to be from available
cash on hand which is generated from profitable cash flow from
operations. The Company has no material commitments at this time
other than its quarterly payments of $50,000 on the long-term note
payable.
The Company is currently investigating various accounting and
inventory computer systems which could lead to a one time material
expenditure not to exceed $175,000. No decisions have been made, but
<PAGE>
it is expected that the new system will be purchased and installed
prior to September 30, 1998.
The Company's overall financial condition continues to improve and now
that the Company has secured long term financing, it has more
assurances than any time in recent years that it will continue
operations.
PART II
Item 1. Legal Proceedings
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 Consumer Products; (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.
The Company is a defendant in a case in Porter Superior Court, in
Indiana captioned Jackson v. Multipress et. al. No. 64D02-9311-CT-
2675. The plaintiff alleges she injured her hand while using a
Multipress machine. Due to a decision made by the Company's
management at the time the case began (prior to March 1995) not to
seek insurance coverage, the Company could be responsible for the
entire amount of any judgment or settlement.
Various other 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 business and are
routine litigation incidental to such business. None of the
litigation matters currently pending is deemed to be material by
management of the Company.
Item 2. Changes in Securities and Use of Proceeds
On November 25, 1997, the Company consummated a private placement
offering of 30 Units at a purchase price of $51,000 per Unit for total
proceeds of $1,530,000. These Units were sold through Eastlake
<PAGE>
Securities, Inc. an NASD member firm as "Placement Agent." The
Placement Agent's fee was $75,000. The Units were sold to accredited
investors and the Company believes the sales were exempt from
registration under the Securities Act of 1993 under Section 4(2) of
that Act and Rules 505 and 506 of Regulation D under that Act. The
Units were sold to less than 30 accredited investors without any
public solicitation.
Each of the 30 Units consisted of (1) $50,000 beneficial interest in a
6% Secured Note in the principal amount of $1,500,000 issued jointly
and severally by the Company and its wholly-owned subsidiary. QPI
Multipress, Inc. to the order of Eastlake Securities, Inc. as agent
for the lenders pursuant to a credit agreement, (2) a Series A Common
Stock Purchase Warrant to purchase ten thousand (10,000) shares of the
Company's common stock at $1.00 per share during the period November
1, 1997 to September 30, 1997 to September 30, 1999, and (3) a Series
B Common Stock Purchase Warrant to purchase fifteen thousand (15,000)
shares of Common Stock at $2.00 per share during the period October 1,
1999 to September 30, 2001. The 6% Secured Note is secured by all of
the assets of the Company and its subsidiary.
The proceeds of the offering totaled $1,533,762.15 including interest
of $3,762.15. The expenses of the offering totaled $135,363.31
including the $75,000 placement fee to Eastlake Securities, Inc.,
leaving net proceeds of $1,398,398.84. Of that amount, $1,160,785.96
was used to pay off a short term debt of that amount to Provident Bank
and $237,612.88 was used to pay a short term debt to Eastlake
Securities.
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: February 13, 1998 By /s/ Bruce C. Weaver
------------------------
Bruce C. Weaver
President (Principal Executive
Officer)
By /s/ Jonathon Reuben
------------------------
Jonathon Reuben
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 419,391
<SECURITIES> 0
<RECEIVABLES> 775,650
<ALLOWANCES> 11,867
<INVENTORY> 882,000
<CURRENT-ASSETS> 2,237,908
<PP&E> 846,127
<DEPRECIATION> 812,189
<TOTAL-ASSETS> 2,276,166
<CURRENT-LIABILITIES> 1,242,687
<BONDS> 1,650,000
0
0
<COMMON> 25
<OTHER-SE> (616,546)
<TOTAL-LIABILITY-AND-EQUITY> 2,276,166
<SALES> 1,731,415
<TOTAL-REVENUES> 1,731,415
<CGS> 1,135,536
<TOTAL-COSTS> 988,201
<OTHER-EXPENSES> 29,463
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,646
<INCOME-PRETAX> 174,094
<INCOME-TAX> 6,049
<INCOME-CONTINUING> 168,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168,045
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.06
</TABLE>
