<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, 1998
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) 228-0185
(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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: February 12, 1999, 2,554,056 shares
of common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
Page 1
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QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents $440,436
Trade accounts receivable, less
allowance for doubtful accounts of $ 11,867 988,432
Inventories 763,614
Other Current Assets 83,978
-----------
Total Current Assets $2,276,460
Property and Equipment 1,018,423
Less Accumulated Depreciation (830,617)
-----------
Property and Equipment, net $187,806
Other Assets 54,084
TOTAL ASSETS $2,518,350
===========
</TABLE>
See notes to Consolidated Financial Statements
Page 2
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QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
December 31, 1998
(Unaudited)
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $502,649
Accrued expenses 215,955
Customer deposits 328,886
Notes payable, current 164,739
Notes payable, related parties, current 80,000
Income Taxes payable 6,500
----------
Total Current Liabilities $1,298,729
----------
NON-CURRENT LIABILITIES:
Notes payable, non-current $720,938
Notes payable, related parties, non-current 820,000
----------
Total non-current liabilities $1,540,938
----------
TOTAL LIABILITIES $2,839,667
----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDER'S DEFICIT:
Preferred stock, convertible, voting, par
Value $.00001; 10,000,000 shares authorized;
No shares issued and outstanding
Common stock, $.00001 par value; 20,000,000 $25
shares authorized; 2,554,056 shares issued and
outstanding; 1,733,333 shares reserved
Additional paid in capital 30,053,284
Accumulated deficit (25,348,654)
Less: Treasury stock, 176,775 shares at cost (5,025,972)
----------
Total stockholders' deficit ($321,317)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $2,518,350
==========
</TABLE>
See notes to Consolidated Financial Statements
Page 3
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QUALITY PRODUCTS, INC.
CONSOLIDATED
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the three months ended
December 31,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales $1,624,041 $1,731,415
Cost of Goods Sold $1,071,273 $1,135,536
---------- ----------
Gross Profit $552,768 $595,879
Selling, General, & Administrative Expenses $355,735 $392,322
---------- ----------
Operating Income $197,033 $203,557
Other Income(Expense)
Interest Expense ($25,655) ($34,048)
Interest Income $6,376 $5,402
Other Income(Expense) $239 ($817)
---------- ----------
Total Other Income(Expense) ($19,040) ($29,463)
Income Before Income Taxes $177,993 $174,094
Income Taxes $4,550 $6,049
---------- ----------
Net Income $173,443 $168,045
Earnings per share:
Basic earnings per common share (Note 3) $0.07 $0.07
----- -----
Diluted earnings per common share (Note 3) $0.07 $0.06
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</TABLE>
See notes to Consolidated Financial Statements
Page 4
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QUALITY PRODUCTS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended
December 31,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $173,443 $168,045
Adjustments to reconcile net income to net
cash used by operating activities;
Depreciation and amortization 7,842 3,311
Cash used for current assets and liabilities:
Restricted Cash 15,662 26,832
Accounts receivable (361,801) (73,055)
Inventories (37,574) (73,683)
Other assets 2,638 (137,641)
Accounts payable 59,498 223,257
Accrued expenses (15,418) (265,650)
Customer Deposits (30,621) (43,828)
Income Taxes Payable 4,500 6,049
---------- ----------
Cash used by operating activities ($181,831) ($166,363)
Cash Flows Used by Investing Activities:
Purchase of machinery & equipment (29,645) (1,274)
Cash Flows From Financing Activities:
Borrowings-Bank Note 39,805 --
Principal Repayments-Bank Note (7,418) --
Principal Repayments - Notes Payable -- (135,000)
Issuance of Debentures -- 1,530,000
Principal Repayment - Debentures (50,000) (50,000)
Principal Repayment - Bank Line of Credit -- (1,180,000)
---------- -----------
Cash used for financing activities (17,613) 165,000
Net Increase (Decrease) in Cash (229,089) (2,637)
Cash at Beginning of Period 669,525 406,624
---------- -----------
Cash at End of Period $440,436 $403,987
========== ===========
</TABLE>
See notes to Consolidated Financial Statements
Page 5
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Cash Flow Information - continued
The Company's cash payments for interest and income taxes were as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Cash paid for interest 25,654 30,373
Cash paid for taxes 50 --
</TABLE>
Supplemental Disclosure of Non-cash Investing Activities:
In the period ended December 31,1998 the Company acquired computer hardware and
software in exchange for a note payable in the amount of $15,005.
Page 6
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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, Article 10 of Regulation S-X
and Regulation S-B. 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, 1998, 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,
1998, are not necessarily indicative of the results that may be expected for the
year ended September 30, 1999.
2. Inventories
Inventories at December 31, 1998 consist of:
<TABLE>
<S> <C>
Raw materials and supplies $501,931
Work-in-process 247,101
Finished goods 18,400
Reserve for obsolescence (3,818)
---------
Total $763,614
=========
</TABLE>
Page 7
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3. 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:
1998 1997
---- ----
<S> <C> <C>
BASIC:
Average Shares Outstanding 2,554,056 2,554,033
Net Income $173,443 $168,045
Basic Earnings Per Share $0.07 $0.07
</TABLE>
Page 8
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Note 3 - continued
<TABLE>
<CAPTION>
3 Months Ended December 31:
1998 1997
---- ----
<S> <C> <C>
DILUTED:
Average Shares Outstanding 2,554,056 2,554,033
Net Effect of Dilutive
Stock options and warrants
based on the treasury stock
method using average market price 0 248,888
Total Shares 2,554,056 2,802,921
Net Income $173,443 $168,045
Diluted Earnings Per Share $0.07 $0.06
Average Market Price of Common Stock $0.39 $1.32
Ending Market Price of Common Stock $0.35 $1.06
</TABLE>
The following securities were excluded from the calculation of diluted earnings
per share at December 31, 1998 because they are considered anti-dilutive under
FAS 128:
1) Options granted to a Company officer and director to purchase 50,000 shares
of the Company's common stock at $2.00 per share and 175,000 shares at $1.00
per share.
2) Warrants issued pursuant to the Company's debentures to purchase 495,000
shares of common stock @ $2.00 per share and 330,000 shares at $1.00 per
share.
3) Options granted to Company employees to purchase 150,000 shares of the
Company's common stock at $1.00 per share.
4) Options granted to holders of a convertible note to purchase 533,333 shares
of common stock at $0.75 per share.
Page 9
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4. Notes Payable
In August 1996, the Company entered into a note payable in the amount of
$500,000 with a former shareholder in connection with the settlement of certain
litigation. The note was convertible, upon demand, into 500,000 to 666,666
shares of common stock of the Company at a price of $0.75 to $1.00 per share.
The Company was required to make quarterly interest only payments at 6% per
annum. The agreement contains certain acceleration clauses. The principal amount
of the note and unpaid interest are payable in full in August 2001.
In August 1997, the note was purchased by two individuals (including a
current member of the Board of Directors of the Company and a former Company
officer) who immediately converted $100,000 ($50,000 each) into 133,332
common shares (66,666 each). The remaining notes totaling $400,000,
convertible at $0.75 per share and bearing interest at 6%, remain outstanding
at December 31, 1998.
In April 1998, one of the note holders entered into an agreement with the
Company to forebear and forgive all remaining interest payments for the
remaining life of the note.
In November 1997, the Company initiated and consummated a private placement
offering of 30 units of Company debentures in the amount of $1,530,000.
$1,250,000 remains outstanding at December 31, 1998. 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.
In August 1998, the Company entered into an agreement with a local bank to
borrow up to $150,000 to replace the Company's computer information systems.
$135,677 was outstanding under this agreement at December 31, 1998.
Maturities of notes payable for the 5 years succeeding December 31, 1998 are:
<TABLE>
<S> <C>
1999 $ 244,738
2000 1,098,464
2001 442,475
----------
Total $1,785,677
==========
</TABLE>
Page 10
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7. Income Taxes
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 1998 and 1997 are substantially
composed of the Company's net operating loss carryforwards, for which the
Company has made a full valuation allowance.
The valuation allowance decreased approximately $(77,000) and $(75,000) in the
period ended December 31, 1998 and 1997, respectively, representing primarily
net taxable income in those periods. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment.
At December 31, 1998, the Company had net operating loss carryforwards for
Federal and State income tax purposes of approximately $28,685,000 and
$29,496,000, respectively, which is available to offset future taxable income,
if any, through 2010.
Page 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended December 31, 1998 as Compared to December 31, 1997
Net Sales for the three months ended December 31, 1998 were $1,624,041 as
compared to $1,731,415 for the three months ended December 31, 1997, a decrease
of $107,374 or 6.2%. Gross profit was $552,768 or 34% of sales as compared to
$595,879 or 34% of sales for the same period a year earlier. Sales remained
steady even though the Company continues to face extended delivery times as
customers continue to order non-standard equipment. The complex machines have
significantly increased the workload for both the engineering and production
departments. Additionally, the tight labor market hinders the Company's ability
to locate and hire adequately trained workers. However, in the period ended
December 31, 1998 the Company added two engineers to the staff and continued to
outsource some design work. The additional staff has significantly reduced the
delays in the electrical engineering area and should improve the delays in the
remaining engineering areas in the future. Despite these temporary difficulties
the Company maintains a strong backlog of $1.4 million. Gross profit remained
steady as a percentage of sales due to an increase in selling prices and product
cost reductions.
Selling, general and administrative expenses decreased from $392,322 during the
three months ended December 31, 1997 to $355,735 for the three months ended
December 31, 1998. Selling general and administrative expenses as a percentage
of sales were 21.9% during the three months ended December 31, 1998 as compared
to 22.7% for the three months ended December 31, 1997. Selling, general and
administrative costs decreased due to one-time payments in 1997, including a
$10,000 hiring bonus to Multipress's President and $20,000 to certain Company
officers for repricing of stock options.
Interest expense for the three months ended December 31, 1998 was $25,655 as
compared to $34,048 for the comparable period a year earlier. The decrease is
due primarily to the reduction of the principal on the Company's outstanding
indebtedness.
The Company currently has $1,450,000 of 6% debt represented by $1,250,000 first
secured debt issued in November 1997 and $200,000 second secured convertible
debt. An additional $200,000 of the second secured convertible note is interest
free as of March 1, 1998. In August 1998, QPI Multipress, Inc. entered into a
loan agreement with a local bank to finance computer equipment. The agreement
allowed Multipress to borrow up to $150,000 at 8.04% interest and to repay the
loan over 39 months. Currently, there is $135,677 outstanding on this loan.
Net income for the period was $173,443 as compared to $168,045 for the same
three month period a year earlier, an increase of $5,398 or 3.2%.
The income tax provision in the three months ended December 31, 1998 and 1997
includes a benefit related to utilization of NOL carry forwards of approximately
$75,000. The 1998 provision relates to the Company's city income taxes.
Page 12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had a working capital surplus of $977,732
as compared to a working capital surplus of $995,221 at December 31, 1997 and a
working capital surplus of $895,155 at September 30, 1998. This surplus should
continue to increase as the Company anticipates profitable operations in the
future. The Company's major source of liquidity continues to be from internal
operations of the Company.
Year 2000 Compliance
The Company utilizes a number of computer programs in its operations. Any of the
Company's programs that recognize a date using "00" as the year 1900 rather than
the year 2000 could result in errors or system failures. The Company is
currently implementing and testing an accounting and inventory computer system
and expects it to be fully functional by April 1. Financing for the system is
provided under a three year term loan from a local bank. The software is
certified year 2000 compliant. The Company believes that this purchase will
materially reduce the exposure of the Company to future year 2000 compliance
expenses. In the event the Company is unable to fully implement the software
before January 1, 2000 the Company's accounting and information systems will
fail resulting in a material financial risk to the Company.
Statements in this Form 10-QSB that are not historical facts, including
statements about the Company's prospects, about the future impact of litigation,
and the possible conversion of notes to stock, are forward-looking statements
that involve risks and uncertainties. These risks and uncertainties could cause
actual results to differ materially from the statements made, including the
impact of the litigation against the Company. Please see the information
appearing in the Company's 1998 Form 10-KSB under "Risk Factors."
Page 13
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
Page 14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized:
QUALITY PRODUCTS, INC.
Registrant
Date: February 11, 1999 By /s/ Bruce C. Weaver
------------------------------
Bruce C. Weaver
President (Principal Executive
Officer)
By /s/ Tac D. Kensler
------------------------------
Tac D. Kensler
Chief Financial Officer
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 440436
<SECURITIES> 0
<RECEIVABLES> 1000299
<ALLOWANCES> (11867)
<INVENTORY> 763614
<CURRENT-ASSETS> 2276460
<PP&E> 1018423
<DEPRECIATION> (830617)
<TOTAL-ASSETS> 2518350
<CURRENT-LIABILITIES> 1298729
<BONDS> 1540938
0
0
<COMMON> 25
<OTHER-SE> (321342)
<TOTAL-LIABILITY-AND-EQUITY> 2518350
<SALES> 1624041
<TOTAL-REVENUES> 1624041
<CGS> 1071273
<TOTAL-COSTS> 1427008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25655
<INCOME-PRETAX> 177993
<INCOME-TAX> 4550
<INCOME-CONTINUING> 173443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173443
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
