<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 June 30, 1999
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: August 10, 1999, 2,554,056 shares of
common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
1
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
June 30, 1999
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 396,676
Trade accounts receivable, less
allowance for doubtful accounts of $ 11,867 731,115
Inventories 703,781
Other Current Assets 88,223
----------
Total Current Assets 1,919,795
Property and Equipment 1,029,763
Less Accumulated Depreciation (854,163)
----------
Property and Equipment, net 175,600
Other Assets 29,269
TOTAL ASSETS $2,124,664
----------
----------
</TABLE>
See notes to Consolidated Financial Statements
2
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
June 30, 1999
(Unaudited)
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 333,455
Accrued expenses 227,461
Customer deposits 71,392
Note payable, current 166,550
Note payable, related parties, current 80,000
------------
Total Current Liabilities $ 878,858
------------
NON-CURRENT LIABILITIES:
Notes payable, non-current $ 635,991
Notes payable, related parties, non-current 780,000
------------
Total non-current liabilities $ 1,415,991
------------
TOTAL LIABILITIES $ 2,294,849
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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 (25,197,522)
Less: Treasury stock, 176,775 shares at cost (5,025,972)
------------
Total stockholders' deficit ($ 170,185)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,124,664
------------
------------
</TABLE>
See notes to Consolidated Financial Statements
3
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended For the three months ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 4,883,718 $ 4,883,401 $ 1,212,535 $ 1,441,994
Cost of Goods Sold 3,264,390 3,216,659 846,108 971,247
----------- ----------- ----------- -----------
Gross Profit 1,619,328 1,666,742 366,427 470,747
Selling, General, & Admin Expenses 1,241,621 1,337,772 401,130 519,876
Operating Income (Loss) 377,707 328,970 (34,703) (49,129)
Other Income (Expense):
Interest Expense (73,689) (86,473) (23,639) (24,675)
Interest Income 16,742 20,376 4,374 7,768
Other Income(Expense) 4,582 105,194 3,382 108,824
----------- ----------- ----------- -----------
Total Other Income (Expense) (52,365) 39,097 (15,883) 91,917
Income Before Income Taxes 325,342 368,067 (50,586) 42,788
Income Taxes 767 36,847 4,500 24,414
----------- ----------- ----------- -----------
Net Income (Loss) $ 324,575 $ 331,220 (55,086) $ 18,374
Earnings per share:
Basic earnings (loss) per common share(Note 3) $ 0.13 $ 0.13 $ (0.02) $ 0.01
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings(loss) per common share(Note 3) $ 0.13 $ 0.12 $ (0.02) $ 0.01
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to Consolidated Financial Statements
4
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
June 30,
1999 1998
(unaudited) (unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 324,575 $ 331,220
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization 31,389 9,829
Changes in operating assets and liabilities:
Restricted Cash 15,662 26,661
Accounts receivable (104,484) (47,802)
Inventories 22,259 (97,071)
Other assets 23,207 (131,203)
Accounts payable (109,695) 106,355
Accrued expenses (3,912) (261,130)
Customer Deposits (288,115) 164,980
Income Taxes Payable (2,000) (23,840)
---------- ---------
Cash provided by (used for) operating activities (91,114) 77,999
Cash Flows Used by Investing Activities :
Purchase of machinery & equipment (40,985) (3,913)
Cash Flows From Financing Activities:
Bank Borrowings 39,805 --
Principal Repayment-Bank Note (30,555) --
Principal Repayments - Notes Payable -- (135,000)
Issuance of Debentures -- 1,530,000
Principal Repayment - Debentures (150,000) (150,000)
Principal Repayment - Bank Line of Credit -- (1,180,000)
---------- ---------
Cash provided by (used for) financing activities (140,750) 65,000
Net Increase (Decrease) in Cash (272,849) 139,086
Cash at Beginning of Period 669,525 406,624
---------- ---------
Cash at End of Period $ 396,676 $ 545,710
---------- ---------
---------- ---------
</TABLE>
See notes to Consolidated Financial Statements
5
<PAGE>
Cash Flow Information - continued
The Company's cash payments for interest and income taxes were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash paid for interest $ 73,688 $ 88,380
Cash paid for taxes $ 13,567 $ 66,989
</TABLE>
Supplemental Disclosure of Non-cash Investing Activities:
In the nine months ended June 30, 1999 the Company acquired computer hardware
and software in exchange for a note payable in the amount of $15,005.
6
<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 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 nine months ended June 30, 1999, are not necessarily indicative of
the results that may be expected for the year ended September 30, 1999.
2. Inventories
Inventories at June 30, 1999 consist of:
<TABLE>
<S> <C>
Raw materials and supplies $ 524,693
Work-in-process 149,674
Finished goods 33,232
Reserve for obsolescence (3,818)
---------
Total $ 703,781
---------
---------
</TABLE>
7
<PAGE>
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 9 Months Ended
June 30 June 30
1999 1998 1999 1998
------- -------- ------- -------
<S> <C> <C> <C> <C>
BASIC:
Average Shares Outstanding 2,554,056 2,554,056 2,554,056 2,554,056
Net Income (Loss) $ (55,086) $ 18,374 $ 324,575 $ 331,220
Basic Earnings (Loss) Per Share $ (0.02) $ 0.01 $ 0.13 $ 0.13
</TABLE>
8
<PAGE>
Note 3 - continued
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
DILUTED:
Average Shares Outstanding 2,554,056 2,554,056 2,554,056 2,554,056
Net Effect of Dilutive
Stock options and warrants
based on the treasury stock
method using average market price 0 240,020 0 297,453
Total Shares 2,554,056 2,794,076 2,554,056 2,851,509
Net Income (Loss) $ (55,086) $ 18,374 $ 324,575 $ 331,220
Diluted Earnings (Loss) Per Share $ (0.02) $ 0.01 $ 0.13 $ 0.12
Average Market Price
of Common Stock $ 0.4932 $ 1.1288 $ 0.4901 $ 1.2129
Ending Market Price
of Common Stock $ 0.5625 $ 1.0625 $ 0.5625 $ 1.0625
</TABLE>
The following securities were excluded from the calculation of diluted
earnings per share at June 30, 1999 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.
9
<PAGE>
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 June 30, 1999.
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.
$1,150,000 remains outstanding at June 30, 1999. 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.
$112,541 was outstanding under this agreement at June 30, 1999.
Maturities of notes payable for the 5 years succeeding June 30, 1999 are:
<TABLE>
<S> <C>
2000 $ 246,550
2001 1,000,465
2002 415,526
----------
Total $1,662,541
----------
----------
</TABLE>
10
<PAGE>
5. Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at June 30, 1999 and 1998 are
substantially composed of the Company's net operating loss carryforwards, for
which the Company has made a full valuation allowance.
The valuation allowance increased approximately $22,000 in the period ended
June 30, 1999 and decreased approximately $(18,000)in the period ended June
30, 1998. 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 June 30, 1999, the Company had net operating loss carryforwards for
Federal and State income tax purposes of approximately $28,635,000 and
$29,483,000, respectively, which is available to offset future taxable
income, if any, through 2010.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 as Compared to June 30, 1998
Net Sales for the three months ended June 30, 1999 were $1,212,535 as
compared to $1,441,994 for the three months ended June 30, 1998, a decrease
of $229,459 or 15.9%. Gross profit was $366,427 or 30.2% of sales as compared
to $470,747 or 32.6% of sales for the same period a year earlier. Sales
decreased due to a slowdown in new orders during the prior period ending
March 31, when the Company's backlog was $723,000. However, new orders have
increased and the backlog is now at $1.3 million. The Company expects sales
for the three months ending September 30, 1999 to increase to approximately
$1.4 million.
Selling, general and administrative expenses decreased from $519,876 during
the three months ended June 30, 1998 to $401,130 for the three months ended
June 30, 1999. The decrease is due primarily to the discontinuance of
expenses related to the buyout of the employment contract of the Company's
former Chief Financial Officer, which were included in the same period last
year. Selling, general and administrative expenses as a percentage of sales
decreased to 33.1% during the three months ended June 30, 1999 as compared to
36.1% for the three months ended June 30, 1998. The percentage is expected to
remain constant in the next period.
Interest expense of $23,639 was offset by $4,374 of interest revenue for a
net interest expense of $19,265 for the three months ended June 30, 1999 as
compared to $16,907 for the comparable period a year earlier. The increase is
due primarily to the addition of the Company's computer equipment loan.
The Company currently has $1,350,000 of 6% debt represented by $1,150,000
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 $112,541
outstanding on this loan.
Net loss for the period was $(55,086) as compared to net income of $18,374
during the corresponding period a year earlier, a decrease of $73,460 or
399.8%. The decrease is primarily due to the decrease in sales. However, the
comparable period last year included $108,824 of other income relating to a
refund of worker's compensation premiums and a reversal of expenses
previously estimated which were never realized. Comparing the two periods on
an operating basis demonstrates both periods are similar. Operating loss for
the current period is $(34,704) and for the comparable period last year was
$(49,129).
12
<PAGE>
The income tax provision for the period ending June 30, 1999 includes no
benefit related to utilization of NOL carry forwards as the Company has made
a full valuation allowance against the Company's deferred tax asset. The
period ending June 30, 1998 includes a benefit of approximately $12,000
related to utilization of NOL carryforwards. The 1999 provision relates to
city income taxes.
13
<PAGE>
Nine Months Ended June 30, 1999 as Compared to June 30, 1998
Net Sales for the nine months ended June 30, 1999 were $4,883,718 as compared
to $4,883,401 for the nine months ended June 30, 1998, an increase of $317.
Gross profit was $1,619,328 or 33.2% of sales as compared to $1,666,742 or
34.1% of sales for the same period a year earlier. Sales remained steady even
though the Company experienced a slowdown in new orders in the period ending
March 31, 1999. Sales are expected to increase slightly in the three months
ending September 30, 1999 to approximately $1.4 million.
Selling, general and administrative expenses decreased from $1,337,772 during
the nine months ended June 30, 1998 to $1,241,621 for the nine months ended
June 30, 1999. Selling general and administrative expenses as a percentage of
sales decreased to 25.4% during the nine months ended June 30, 1999 as
compared to 27.3% for the nine months ended June 30, 1998. The decrease is
due to the elimination of one-time charges relating to the repricing of
executive stock options and the buyout of the employment contract of the
Company's former Chief Financial Officer, occurring in the same period last
year. Selling, general, and administrative expenses as a percentage of sales
is expected to remain constant in the next period.
Interest expense of $73,689 was offset by $16,742 of interest revenue for a
net interest expense of $56,947 for the nine months ended June 30, 1999 as
compared to $66,097 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 $1,350,000 of 6% debt represented by $1,150,000
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 $112,541
outstanding on this loan.
Net income for the period was $324,575 as compared to $331,220 during the
corresponding period a year earlier. The decrease of $6,645 is primarily due
to the $105,194 of other income included in the comparable period last year.
The income tax provision for the period ending June 30, 1999 and 1998
includes a benefit related to utilization of NOL carry forwards of
approximately $140,000 and 158,000, respectively. The 1999 provision relates
to city income taxes.
14
<PAGE>
Liquidity and Capital Resources
As of June 30, 1999, the Company had a working capital surplus of $1,040,937
as compared to a working capital surplus of $1,059,277 at June 30, 1998 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.
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. On June
1, the Company activated new hardware and software systems and is operating
all aspects of business on this new system. Financing for the system is
provided under a three-year term loan from a local bank. The software and
hardware 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.
The Company is unaware of any supplier or customer who would pose a material
risk to the Company in the event the supplier or customer is not compliant by
January 1, 2000. The Company is not dependent on any one supplier or customer
and the Company has alternate suppliers and customers available in the event
of failure.
Many of the Company's products contain programmable logic controls (PLC's)
operated by computer hardware and software. The Company's suppliers have
stated all PLC's are year 2000 compliant, and it is unlikely the Company will
be required to replace any existing components.
In the event of complete failure in all year 2000 areas, the Company could
continue to operate at a significantly reduced level of efficiency resulting
in materially increased costs to the Company. The Company is capable of
switching suppliers and transaction processing could be performed manually to
achieve continuing operations.
15
<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
Statements in this Form 10-QSB that are not historical facts, including
statements about the Company's prospects, 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."
16
<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: August 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
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 396,676
<SECURITIES> 0
<RECEIVABLES> 742,982
<ALLOWANCES> (11,867)
<INVENTORY> 703,781
<CURRENT-ASSETS> 1,919,795
<PP&E> 1,029,763
<DEPRECIATION> (854,163)
<TOTAL-ASSETS> 2,124,664
<CURRENT-LIABILITIES> 878,858
<BONDS> 1,415,991
0
0
<COMMON> 25
<OTHER-SE> (170,210)
<TOTAL-LIABILITY-AND-EQUITY> 2,124,664
<SALES> 1,212,535
<TOTAL-REVENUES> 1,212,535
<CGS> 846,108
<TOTAL-COSTS> 1,247,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,639
<INCOME-PRETAX> (50,586)
<INCOME-TAX> 4,500
<INCOME-CONTINUING> (55,086)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,086)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
