<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 March 31, 2000
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: May 9, 2000, 2,554,056
shares of common stock outstanding.
1
<PAGE>
PART I - FINANCIAL INFORMATION
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash and cash equivalents $ 966,657
Trade accounts receivable, less
allowance for doubtful accounts of $ 11,867 698,085
Inventories 858,591
Other Current Assets 98,098
----------
Total Current Assets 2,621,431
Property and Equipment 860,802
Less Accumulated Depreciation (708,658)
----------
Property and Equipment, net 152,144
TOTAL ASSETS $2,773,575
==========
</TABLE>
See notes to Consolidated Financial Statements
2
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 563,063
Accrued expenses 185,350
Customer deposits 206,096
Income taxes payable 7,352
Note payable, current 649,453
Note payable, related parties, current 400,000
-------
Total Current Liabilities $ 2,011,314
-----------
NON-CURRENT LIABILITIES:
Notes payable, non-current $ 26,680
Notes payable, related parties, non-current 400,000
------------
Total non-current liabilities $ 426,680
----------
TOTAL LIABILITIES $ 2,437,994
------------
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 (24,691,756)
----------
Total stockholders' equity $ 335,581
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,773,575
============
</TABLE>
See notes to Consolidated Financial Statements
3
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED
STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended For the three months ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $3,497,500 $3,671,183 $1,794,221 $2,047,142
Cost of Goods Sold 2,164,205 2,418,283 1,147,731 1,347,009
------------ ------------ ------------ --------
Gross Profit 1,333,295 1,252,900 646,490 700,133
Selling, General, & Admin Expenses 878,442 840,491 418,261 484,756
------------ ------------ ------------ ---------
Operating Income 454,853 412,409 228,229 215,377
Other Income (Expense):
Interest Expense (40,486) (50,050) (12,635) (24,396)
Interest Income 18,831 12,368 9,770 5,992
Other Income 4,890 1,200 2,247 961
------------ ------------ ------------ ---------
Total Other (Expense) (16,765) (36,482) (618) (17,443)
Income Before Income Taxes 438,088 375,927 227,611 197,934
Income Taxes 13,864 (3,733) 10,583 (8,283)
------------ ------------ ------------ ----------
Net Income $ 424,224 $ 379,660 217,028 $206,217
Earnings per share:
Basic and diluted earnings per common $ 0.17 $ 0.15 $ 0.08 $ 0.08
share(Note 3) ============= ============= ========== =========
</TABLE>
See notes to Consolidated Financial Statements
4
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended
March 31,
2000 1999
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $424,224 $379,660
Adjustments to reconcile net income to net
cash provided by operating activities;
Depreciation and amortization 24,004 19,607
Cash provided by current assets and liabilities:
Restricted Cash -- 15,662
Accounts receivable 311,653 (197,989)
Inventories (276,682) 90,739
Other assets (2,185) (6,975)
Accounts payable 140,114 113,498
Accrued expenses (85,462) (29,011)
Customer Deposits (104,272) (265,866)
Income Taxes Payable 7,352 (2,000)
------------ --------------
Cash provided by operating activities $438,746 $117,325
Cash Flows Used by Investing Activities:
Purchase of machinery & equipment (10,979) (38,850)
Cash Flows From Financing Activities:
Borrowings-Bank Note -- 39,805
Principal Repayments-Bank Note (28,533) (18,883)
Principal Repayment - Debentures (100,000) (100,000)
--------- ---------
Cash used for financing activities (128,533) (79,078)
Net Increase (Decrease) in Cash 299,234 (603)
Cash at Beginning of Period 667,423 669,525
------- -------
Cash at End of Period $966,657 $668,922
======== ==========
</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>
Six Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Cash paid for interest 42,486 50,050
Cash paid for taxes 6,512 9,067
</TABLE>
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, 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 six months ended March 31, 2000, are not necessarily indicative of
the results that may be expected for the year ended September 30, 2000.
2. Inventories
Inventories at March 31, 2000 consist of:
<TABLE>
<S> <C>
Raw materials and supplies $509,283
Work-in-process 317,057
Finished goods 32,251
-----------
Total $ 858,591
=========
</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>
6 Months Ended 3 Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC:
Average Shares Outstanding 2,554,056 2,554,056 2,554,056 2,554,056
Net Income $ 424,224 $ 379,660 $ 217,028 $206,217
Basic Earnings Per Share $ 0.17 $ 0.15 $ 0.08 $ 0.08
</TABLE>
8
<PAGE>
Note 3 - continued
<TABLE>
<CAPTION>
6 Months Ended 3 Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
DILUTED:
<S> <C> <C> <C> <C>
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 0 121,514 0
Total Shares 2,554,056 2,554,056 2,675,570 2,554,056
Net Income, excluding interest
expense on dilutive securities $ 424,224 $ 379,660 $ 220,028 $ 206,217
Diluted Earnings Per Share $ 0.17 $ 0.15 $ 0.08 $ 0.08
Average Market Price
of Common Stock $ 0.7324 $ 1.4873 $ 0.9713 $ 0.6212
Ending Market Price
of Common Stock $ 1.0625 $ 0.5625 $ 1.0625 $ 0.5625
</TABLE>
The following securities were excluded from the calculation of diluted
earnings per share at March 31, 2000 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 (omitted from the calculation for the six months ended March
31, 2000, but included in the calculation for the three months
ended March 31, 2000).
9
<PAGE>
4. Notes Payable
Maturities of notes payable for the 5 years succeeding March 31, 2000 are:
<TABLE>
<S> <C>
2001 $1,049,453
2002 426,680
----------
Total $1,476,133
==========
</TABLE>
5. Income Taxes
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at March 31, 2000 and 1999 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 $(98,000) in the period ended
March 31, 2000 and decreased approximately $(85,000) in the period ended March
31, 1999. 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 March 31, 2000, the Company had net operating loss carryforwards for Federal
and State income tax purposes of approximately $28,251,000 and $29,161,000,
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 March 31, 2000 as Compared to March 31, 1999
Net Sales for the three months ended March 31, 2000 were $1,794,221 as
compared to $2,047,142 for the three months ended March 31, 1999, a decrease
of $252,921 or 12.4%. Gross profit was $646,490 or 36.0% of sales as compared
to $700,133 or 34.2% of sales for the same period a year earlier. Sales
decreased because the prior period included one unusually large order valued
at $318,000. However, the Company did surpass its expectation of $1.6 million
for the quarter. The Company shipped 67 units in the current period compared
to 65 units in the same period last year. The Company maintains a strong
backlog of approximately $1.2 million. Gross profit increased as a percentage
of sales due to the continuing customer requests for standard products, which
are less labor-intensive than custom machines. The Company expects gross
profit percentages to decrease in the next quarter because shipments may
include more custom machines. The Company expects sales for the three months
ending June 30, 2000 to be approximately $1.7 million.
Selling, general and administrative expenses for the three months ended March
31, 2000 were $418,261 as compared to $484,756 for the three months ended
March 31, 1999, a decrease of $66,495 or 13.7%. The year-ago period included
a one-time expense of $23,750 paid to the President of the Company's
subsidiary, QPI Multipress, Inc., to settle a labor dispute between the
President and his former employer. Commission expenses decreased
approximately $40,000 in the current period as more sales were closed by
non-commissioned salespersons. Selling, general and administrative expenses
as a percentage of sales decreased to 23.3% during the three months ended
March 31, 2000 as compared to 23.7% for the three months ended March 31,
1999. The percentage is expected to remain constant in the next period.
Net interest expense for the three months ended March 31, 2000 was $2,865 as
compared to $18,404 for the comparable period a year earlier. The decrease is
due primarily to the reduction of the principal on the Company's outstanding
indebtedness and the reversal of $5,000 of previously accrued interest, which
was not realized.
The Company currently has $1,400,000 of 6% debt represented by $1,000,000
first secured debt issued in November 1997 and $400,000 second secured
convertible debt.
Net income for the period was $217,028 as compared to $206,217 during the
corresponding period a year earlier, an increase of $10,811 or 5.2%. Net
income is expected to remain consistent in the next period.
The income tax provision in the three months ended March 31, 2000 and 1999
includes a benefit related to utilization of NOL carry forwards of
approximately $98,000 and $85,000 respectively. The 2000 and 1999 provision
relates to the Company's city income taxes.
11
<PAGE>
Six Months Ended March 31, 2000 as Compared to March 31, 1999
Net sales for the six months ended March 31, 2000 were $3,497,500 as compared
to $3,671,183 for the six months ended March 31, 1999, a decrease of $173,683
or 4.7%. Gross profit was $1,333,295 or 38.1% of sales as compared to
$1,252,900 or 34.1% of sales for the same period a year earlier. Sales
decreased because the prior period included one unusually large order valued
at $318,000. However, gross profit increased as a percentage of sales due to
the continuing customer requests for standard products which are less
labor-intensive than custom machines. The Company expects sales for the three
months ending June 30, 2000 to be approximately $1.7 million.
Selling, general and administrative expenses for the six months ended March
31, 2000 were $878,442 as compared to $840,491 for the six months ended March
31, 1999, an increase of $37,951 or 4.5%. Selling general and administrative
expenses as a percentage of sales increased to 25.1% during the six months
ended March 31, 2000 as compared to 22.9% for the six months ended March 31,
1999. The percentage increase is primarily due to the decreased sales for the
six months. The percentage is expected to remain constant in the next period.
Net interest expense was $21,655 for the six months ended March 31, 2000 as
compared to $37,682 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 $1,400,000 of 6% debt represented by $1,000,000
first secured debt issued in November 1997 and $400,000 second secured
convertible debt.
Net income for the period was $424,224 as compared to $379,660 during the
corresponding period a year earlier. Net income is expected to remain
consistent in the next period.
The income tax provision for the period ending March 31, 2000 and 1999
includes a benefit related to utilization of NOL carry forwards of
approximately $187,000 and $159,600, respectively. The 2000 provision relates
to city income taxes.
12
<PAGE>
Liquidity and Capital Resources
As of March 31, 2000, the Company had a working capital surplus of $610,117
as compared to a working capital surplus of $1,138,006 at March 31, 1999 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 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.
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
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."
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized:
QUALITY PRODUCTS, INC.
Registrant
Date: May 9, 2000 By /s/ Bruce C. Weaver
--------------------------------
Bruce C. Weaver
President (Principal Executive
Officer)
By /s/ Tac D. Kensler
--------------------------------
Tac D. Kensler
Chief Financial Officer
15
<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> MAR-31-2000
<CASH> 966,657
<SECURITIES> 0
<RECEIVABLES> 709,952
<ALLOWANCES> (11,867)
<INVENTORY> 858,591
<CURRENT-ASSETS> 2,621,431
<PP&E> 860,802
<DEPRECIATION> (708,658)
<TOTAL-ASSETS> 2,773,575
<CURRENT-LIABILITIES> 2,011,314
<BONDS> 426,680
0
0
<COMMON> 25
<OTHER-SE> 335,556
<TOTAL-LIABILITY-AND-EQUITY> 2,773,575
<SALES> 1,794,221
<TOTAL-REVENUES> 1,794,221
<CGS> 1,147,731
<TOTAL-COSTS> 1,565,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,635)
<INCOME-PRETAX> 227,611
<INCOME-TAX> 10,583
<INCOME-CONTINUING> 217,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 217,028
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
