<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, 1999
Commission file number 0-18145
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 10, 2000,
2,554,056 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes _____ No __X__
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1999
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 688,824
Trade accounts receivable, less
allowance for doubtful accounts of $ 11,867 858,657
Inventories 807,651
Other Current Assets 92,891
-----------
Total Current Assets 2,448,023
Property and Equipment 850,933
Less Accumulated Depreciation (696,421)
-----------
Property and Equipment, net 154,512
Other Assets 3,658
TOTAL ASSETS $ 2,606,193
===========
</TABLE>
See notes to Consolidated Financial Statements
2
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QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
December 31, 1999
(Unaudited)
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 522,133
Accrued expenses 237,006
Customer deposits 186,737
Income taxes payable 3,231
Note payable, current 678,464
Note payable, related parties, current 420,000
------------
Total Current Liabilities $ 2,047,571
------------
NON-CURRENT LIABILITIES:
Notes payable, non-current $ 40,069
Notes payable, related parties, non-current 400,000
------------
Total non-current liabilities $ 440,069
------------
TOTAL LIABILITIES $ 2,487,640
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
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 25,027,312
Accumulated deficit (24,908,784)
------------
Total stockholders' equity $ 118,553
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,606,193
============
</TABLE>
See notes to Consolidated Financial Statements
3
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QUALITY PRODUCTS, INC.
CONSOLIDATED
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the three months ended
December 31,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales $ 1,703,279 $ 1,624,041
Cost of Goods Sold $ 1,016,474 $ 1,071,273
----------- -----------
Gross Profit $ 686,805 $ 552,768
Selling, General, & Administrative Expenses $ 460,181 $ 355,735
----------- -----------
Operating Income $ 226,624 $ 197,033
Other Income(Expense)
Interest Expense ($ 27,851) ($ 25,655)
Interest Income $ 9,061 $ 6,376
Other Income $ 2,643 $ 239
----------- -----------
Total Other (Expense) ($ 16,147) ($ 19,040)
Income Before Income Taxes $ 210,477 $ 177,993
Income Taxes $ 3,281 $ 4,550
----------- -----------
Net Income $ 207,196 $ 173,443
Earnings per share:
Basic and diluted earnings per common share (Note 3) $ 0.08 $ 0.07
----------- -----------
</TABLE>
See notes to Consolidated Financial Statements
4
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QUALITY PRODUCTS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended
December 31,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 207,196 $ 173,443
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 11,767 7,842
Cash used for current assets and liabilities:
Restricted Cash -- 15,662
Accounts receivable 151,081 (361,801)
Inventories (225,742) (37,574)
Other assets (636) 2,638
Accounts payable 99,184 59,498
Accrued expenses (33,806) (15,418)
Customer Deposits (123,631) (30,621)
Income Taxes Payable 3,231 4,500
---------- ----------
Cash provided(used) by operating activities $ 88,644 ($ 181,831)
Cash Flows Used by Investing Activities:
Purchase of machinery & equipment (1,110) (29,645)
Cash Flows From Financing Activities:
Borrowings-Bank Note -- 39,805
Principal Repayments-Bank Note (16,133) (7,418)
Principal Repayment - Debentures (50,000) (50,000)
---------- ----------
Cash used for financing activities (66,133) (17,613)
Net Increase (Decrease) in Cash 21,401 (229,089)
Cash at Beginning of Period 667,423 669,525
---------- ----------
Cash at End of Period $ 688,824 $ 440,436
========== ==========
</TABLE>
See notes to Consolidated Financial Statements
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,
1999 1998
---- ----
<S> <C> <C>
Cash paid for interest 21,851 25,654
Cash paid for taxes 50 50
</TABLE>
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 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, 1999, 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, 1999, are not necessarily
indicative of the results that may be expected for the year ended
September 30, 2000.
2. Inventories
Inventories at December 31, 1999 consist of:
<TABLE>
<S> <C>
Raw materials and supplies $ 442,495
Work-in-process 342,914
Finished goods 22,242
-----------
Total $ 807,651
===========
</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 December 31:
1999 1998
---- ----
<S> <C> <C>
BASIC:
Average Shares Outstanding 2,554,056 2,554,056
Net Income $207,196 $173,443
Basic Earnings Per Share $0.08 $0.07
</TABLE>
8
<PAGE>
Note 3 - continued
<TABLE>
<CAPTION>
3 Months Ended December 31:
1999 1998
---------- ----------
<S> <C> <C>
DILUTED:
Average Shares Outstanding 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 0
Total Shares 2,554,056 2,554,056
Net Income $ 207,196 $ 173,443
Diluted Earnings Per Share $ 0.08 $ 0.07
Average Market Price of Common Stock $ 0.42 $ 0.39
Ending Market Price of Common Stock $ 0.35 $ 0.35
</TABLE>
The following securities were excluded from the calculation of diluted
earnings per share at December 31, 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) Notes convertible into 533,333 shares of common stock at $0.75 per
share.
9
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4. Notes Payable
Maturities of notes payable for the 5 years succeeding December 31, 1999 are:
<TABLE>
<S> <C>
2000 $1,098,464
2001 440,069
----------
Total $1,538,533
==========
</TABLE>
5. Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 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 decreased approximately $(91,000) in the period ended
December 31, 1999 and decreased approximately $(77,000) in the period ended
December 31, 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 December 31, 1999, the Company had net operating loss carryforwards for
Federal and State income tax purposes of approximately $28,328,000 and
$29,181,000, respectively, which is available to offset future taxable
income, if any, through 2010.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended December 31, 1999 as Compared to December 31, 1998
Net Sales for the three months ended December 31, 1999 were $1,703,279 as
compared to $1,624,041 for the three months ended December 31, 1998, an
increase of $79,238 or 4.9%. Gross profit was $686,805 or 40.3% of sales as
compared to $552,768 or 34.0% of sales for the same period a year earlier.
Sales increased due to a more standardized product mix, which decreases
delivery times. The Company shipped 60 units in the current period compared
to 54 units in the same period last year. The Company maintains a strong
backlog of approximately $1.1 million. Gross profit increased as a percentage
of sales due to the unusually high standardized product mix discussed above.
The Company expects gross profit percentages to decrease in the next quarter.
The Company expects sales for the three months ending March 31, 2000 to reach
approximately $1.6 million.
Selling, general and administrative expenses increased from $355,735 during
the three months ended December 31, 1998 to $460,181 for the three months
ended December 31, 1999. Selling general and administrative expenses as a
percentage of sales were 27.0% during the three months ended December 31,
1999 as compared to 21.9% for the three months ended December 31, 1998. Of
the approximately $104,000 increase in selling, general and administrative
expenses, approximately $66,000 is due to non-recurring expenses for the
investigation of new business opportunities. The remaining increase of
approximately $38,000 reflects rising labor and benefits expenses as the
Company attempts to remain competitive in a tight labor market, and
additional commissions due to outside sales representatives. The percentage
is expected to remain constant in the next period.
Net interest expense for the three months ended December 31, 1999 was $18,790
as compared to $19,279 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 $1,050,000
first secured debt issued in November 1997 and $400,000 second secured
convertible debt.
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 $88,533 outstanding on this loan.
Net income for the period was $207,196 as compared to $173,443 for the same
three month period a year earlier, an increase of $33,753 or 19.5%.
The income tax provision in the three months ended December 31, 1999 and 1998
includes a benefit related to utilization of NOL carry forwards of
approximately $89,000 and $74,600 respectively. The 1999 and 1998 provision
relates to the Company's city income taxes.
11
<PAGE>
Liquidity and Capital Resources
As of December 31, 1999, the Company had a working capital surplus of
$400,452 as compared to a working capital surplus of $977,732 at December 31,
1998 and a working capital surplus of $1,102,770 at September 30, 1999. The
decrease is due to the transfer of a majority of the Company's long-term debt
into current liabilities as the debt is now due within one year. However, the
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
To date, the Company has experienced no problems relating to the year 2000
computer issue either internally or from any of its suppliers or customers.
12
<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 1999 Form 10-KSB under "Risk Factors."
13
<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 10, 2000 By /s/ Bruce C. Weaver
-------------------------------------
Bruce C. Weaver
President (Principal Executive
Officer)
By /s/ Tac D. Kensler
--------------------------------------
Tac D. Kensler
Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 688,824
<SECURITIES> 0
<RECEIVABLES> 870,524
<ALLOWANCES> (11,867)
<INVENTORY> 807,651
<CURRENT-ASSETS> 2,448,023
<PP&E> 850,933
<DEPRECIATION> (696,421)
<TOTAL-ASSETS> 2,606,193
<CURRENT-LIABILITIES> 2,047,571
<BONDS> 440,069
0
0
<COMMON> 25
<OTHER-SE> 118,528
<TOTAL-LIABILITY-AND-EQUITY> 2,606,193
<SALES> 1,703,279
<TOTAL-REVENUES> 1,703,279
<CGS> 1,016,474
<TOTAL-COSTS> 1,476,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (27,851)
<INCOME-PRETAX> 210,477
<INCOME-TAX> 3,281
<INCOME-CONTINUING> 207,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207,196
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
