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, 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.
(1) Yes __X__ No _____
As of March 31, 1997 there were 2,395,680 shares of the Company's common stock
outstanding.
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31,
1997
----
(Unaudited)
ASSETS
Current Assets
Cash $ 254,255
Restricted Cash (Note B) 55,098
Accounts receivable, net of allowance of $11,867 967,418
Inventories 614,706
Other current assets 21,475
------------
Total Current Assets 1,912,952
Property, plant and equipment 852,680
Less accumulated depreciation (829,395)
------------
Net property, plant and equipment 23,285
TOTAL ASSETS $ 1,936,237
============
See accompanying notes
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31,
1997
----
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Bank indebtedness 1,280,000
Accounts payable 1,334,940
Accrued expenses 150,740
Due to related party 37,000
------------
Total Current Liabilities 2,802,680
Long-term unsecured note payable 502,500
------------
Total Long-term Liabilities 502,500
------------
TOTAL LIABILITIES 3,305,180
Commitments and Contingencies (Note C)
STOCKHOLDERS' EQUITY
Preferred stock, convertible, voting,
par value $.00001, authorized
10,000,000 shares, issued and
outstanding 25 shares
Common stock, $.00001 par value,
authorized 20,000,000 shares,
issued and outstanding, 2,395,680
shares 24
Additional paid-in capital 29,918,597
Retained earnings (deficit) (26,261,592)
------------
3,657,029
Less:
Treasury stock, 255,708 shares (5,025,972)
------------
Total Stockholders Equity (deficiency) (1,368,943)
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 1,936,237
============
See accompanying notes
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended
March 31,
--------------------------
1997 1996
---- ----
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net Income (Loss) $ 560,028 ($1,215,276)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 8,781 8,986
Stock compensation -- 20,937
Restricted cash 86,799 (1,596)
Accounts receivable (315,188) (147,854)
Inventories (21,199) (27,169)
Other assets (6,859) 1,710
Accounts payable 294,049 (14,781)
Accrued expenses (129,020) 19,537
Due to related party (38,000) 81,979
Accounts receivable from liquidation 5,596,100
----------- -----------
Cash used in operating activities 439,391 4,322,573
Cash Flows From Investing Activities:
Capital expenditures (5,197) (17,574)
----------- -----------
Cash provided by (used in) investing activities (5,197) (17,574)
Cash Flows From Financing Activities:
Repayments to Officer -- (333,202)
Repayments - Notes payable (188,033) (4,106,908)
Unsecured note payable issued -- 500,000
----------- -----------
Cash provided by (used in) financing activities (188,033) (4,440,110)
Net increase (decrease) in cash 245,161 364,889
Cash at Beginning of Period 8,094 93,350
----------- -----------
Cash at End of Period $ 254,255 $ 458,239
=========== ===========
See accompanying notes
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended For the three months ended
March 31 March 31
--------------------------------- ---------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 3,133,942 $ 2,408,085 $ 1,753,305 $ 1,225,697
Cost of Goods Sold 1,954,397 1,651,138 1,084,238 827,925
----------- ----------- ----------- -----------
Gross Profit 1,179,545 756,947 669,067 397,772
Selling, General, & 611,824 923,021 283,971 450,983
Administrative Expenses ----------- ----------- ----------- -----------
Operating Income (loss) 567,721 (166,074) 385,096 (53,211)
Other Income or (Expense)
Interest Expense (79,846) (344,046) (38,556) (115,057)
Litigation Settlement -- (652,929) -- (586,229)
Expense
Litigation Judgment -- (42,012) -- --
Expense
Other (8,781) (10,215) (4,535) (4,881)
----------- ----------- ----------- -----------
Total Other Income (88,627) (1,049,202) (43,091) (706,167)
(Expense)
Income (Loss) Before 479,094 (1,215,276) 342,005 (759,378)
Extraordinary Item
Extraordinary Item 80,934 -- 80,934 --
Net Income (loss) $ 560,028 ($1,215,276) $ 422,939 ($ 759,378)
=========== =========== =========== ===========
Per Common Share Data:
Net income (Loss) Before $ 0.20 ($ 0.61) $ 0.14 ($ 0.38)
Extraordinary Item ----------- ----------- ----------- -----------
Net Income (loss) - primary $ 0.23 ($ 0.61) $ 0.17 ($ 0.38)
- fully diluted $ 0.16 -- $ 0.12 --
=========== =========== =========== ===========
Administrative Expenses
Weighted average used
in per share calculations - primary 2,395,680 1,976,931 2,395,680 1,976,931
- fully diluted 3,587,346 -- 3,587,346 --
=========== =========== =========== ===========
See accompanying notes
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Six Months Ended March 31, 1997
Common Stock Additional Total
Treasury Paid-In Retained Stockholders'
Shares Amount Stock Capital Earnings Equity
------ ------ ----- ------- -------- ------
As of Sept. 30, 1996 2,395,680 $24 ($5,025,972) ($29,918,597) ($26,821,620) ($1,928,971)
Net Income $560,028 $560,028
--------- --- ----------- ------------ ------------ -----------
As of March 31,1997 2,395,680 $24 ($5,025,972) ($29,918,597) ($26,261,592) ($1,368,943)
========= === =========== ============ ============ ===========
See accompanying notes
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Six Months Ended March 31, 1996
Common Stock Additional Total
Treasury Paid-In Retained Stockholders'
Shares Amount Stock Capital Earnings Equity
------ ------ ----- ------- -------- ------
As of Sept. 30, 1995 1,976,931 $20 ($5,025,972) $29,897,664 ($24,975,829) ($104,117)
Stock Issuance
Bonus 279,166 $3 $13,955
Severance 139,583 $1 $ 6,978
Net Loss (1,215,276) (1,215,276)
--------- --- ----------- ------------ ------------ -----------
As of March 31, 1996 2,395,680 $24 ($5,025,972) $29,918,597 ($26,191,105) ($1,298,456)
========= === =========== ============ ============ ===========
See accompanying notes
QUALITY PRODUCTS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are
presented in accordance with the requirements for Form 10-QSB and consequently
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, 1996, 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 are, in the opinion of management, 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, 1997,
are not necessarily indicative of the results that may be expected for the year
ending September 30, 1997.
Note B - Restricted Cash
A Certificate of Deposit is held at the Company's bank as collateral for the
Letter of Credit securing the Company's potential obligations for its Worker's
Compensation policy. The policy expires November 30, 1997. During the period,
$46,287 was drawn on the Letter of Credit to pay past due obligations, $39,843
was used to reduce bank indebtedness and $55,000 was renewed until November 30,
1997.
Note C - Commitments and Contingencies
For additional information on these and other contingencies and commitments
please refer to Part II, Item 1 entitled legal proceedings.
Note D - Cash Flow Information
The Company's non-cash investing and financing activities and cash payments for
interest and income taxes were as follows:
Six Months Ended
March 31,
1997 1996
---- ----
Cash paid for interest $79,846 $344,046
Common Stock issued for
Officer /Employee bonuses -- 13,955
Officer Severance -- 6,978
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three and Six Months Ended March 31, 1997 as Compared to
Three and Six Months Ended March 31, 1996
Consolidated net sales for the three and six months ended March 31, 1997 were
$1,753,305 and $3,133,942, respectively, compared to $1,225,697 and $2,408,085
for the corresponding periods in the prior year. The increase in sales of 43%
and 30%, in the current three and six months, is due to the addition of an
additional salesperson, the hiring of a new marketing executive and the addition
of new, more active manufacturing representatives in certain key territories in
the United States. As the Company's financial condition has improved slightly,
it has also been able to commence a modest marketing program.
Gross profit was $669,067 or 38% of sales for the three months ended March 31,
1997 and $1,179,545 or 37% of sales for the six months ended March 31, 1997
compared to $397,772 or 32% of sales for the three months and $756,947 or 31% of
sales for the six months ended March 31, 1996. Gross profit increased due to the
increase in sales and increased as a percentage of sales due to improvements in
material and plant efficiencies.
Selling, general and administrative expenses were $283,971 and $611,824 for the
three and six months ended March 31, 1997 compared with $450,983 and $923,021
for the corresponding periods in the prior year. Selling general and
administrative expenses were 16.2% and 19.5% of sales during the three and six
months ended March 31, 1997 as compared to 36.8% and 38.3% of sales during the
corresponding periods in the prior year. Selling, general and administrative
costs decreased during the current three and six month periods due to overhead
reductions made such as closing offices, terminating leases, and reducing
personnel. Additional legal and accounting expenses have declined substantially
as the Company continues to settle and eliminate past litigation and brings
itself current with the SEC. Selling, general and administrative expenses as a
percentage of sales decreased due to the above reasons as well as the fact sales
increased by 43% and 30% during the period as compared to the corresponding
period a year earlier.
Interest expense was $38,556 and $79,846 for the three and six months ended
March 31, 1997, respectively, compared to $115,057 and $344,046 for the
corresponding periods in the prior year. The decrease is due to the substantial
reduction in bank indebtedness during the last year and the reduction in the
interest rate charged on the bank indebtedness. Offsetting this decrease was the
interest of $15,000 paid during the six months ending March 31, 1997 to PI, Inc.
resulting from the issuance to PI, Inc. of a 5 year $500,000 6% convertible
promissory note during the last half of fiscal 1996. No such interest was paid
during the corresponding period a year ago.
The Company did not incur any litigation settlement expense during the three and
six months ended March 31, 1997 compared to $652,929 during the corresponding
periods
in the prior year. The significant decrease is due to the fact that
substantially all of the litigation brought against the Company had been settled
or otherwise recorded on the financial statements of the Company during the
corresponding period a year earlier. The Company has several outstanding
judgments against it, including two judgments aggregating approximately
$350,000, one of which, for approximately $170,000, was incurred subsequent to
March 31, 1997. The Company's inability to reduce or settle these judgments will
have a materially adverse effect on the Company's financial condition.
The net income for the six months ended March 31, 1997 was $560,028, including a
$80,934 extraordinary gain on the sale of shares previously written off. Net
income from regular operations was $479,094 as compared to a loss of $1,215,276
for the comparable period a year earlier. Net income for the three months ended
March 31, 1997 was $422,939 including the extraordinary gain of $80,934 [net
income before the extraordinary item was $342,005] as compared to a loss of
$759,378 during the three months period a year earlier. The increase in net
income is due to the increase in sales during the period as compared to a year
ago, and the significant reduction in all major expense categories.
Liquidity and Capital Resources
As at March 31, 1997, the Company had a working capital deficiency of $889,728
as compared to a working capital deficiency of $1,167,756 at December 31, 1996
and a working capital deficiency of $1,455,844 at September 30, 1996.
Cash generated from operations during the six months ended March 31, 1997 was
$439,391 resulting primarily from net income generated during the period of
$560,088 offset by the net increase in accounts receivable over accounts payable
as sales during the period increased significantly.
As with previous fiscal periods, the Company's primary use of cash has been to
reduce its indebtedness to its secured lender and secondly to settle and if
settled reasonably, reduce unsecured accounts payable and other obligations. To
this end, secured debt was reduced by approximately $188,000 during the period
and accounts payable and accrued expenses, other than Multipress accounts
payable, were reduced substantially during the period.
The Company continues to focus on all steps needed to continue to operate as a
going concern. The Company is attempting to increase the sales and net income of
QPI Multipress, reduce secured bank indebtedness, settle and eliminate other
obligations and continue to defend the remaining litigation from the past.
Although improvements are being made, there continues to be no assurance that
improvements will continue. Additionally, the Company is still seeking out a
replacement for its secured lender.
PART II
Item 1. Legal Proceedings
In March 1995, Howard S. Klein sued the Company in the United States
District Court, Eastern District of Pennsylvania for alleged lost profits of
approximately $500,000 on Company stock he purchased from 1989-1993, plus actual
losses incurred of approximately $50,000. On October 3, 1996, the Court granted
the Company summary judgment and dismissed the case against the Company. The
plaintiff appealed to the United States Court of Appeals for the Third Circuit,
and in June 1997, the Court of Appeals affirmed the judgment in the Company's
favor.
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 QPI
Consumer Products Corporation; (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 settled 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.
During fiscal 1995, the Company moved out of its executive offices in Tampa
with a remaining lease term through June 2001 at approximately $6,000 rent per
month. The landlord sued the Company and obtained a judgment for past and future
rents of approximately $162,000, in 1997. Such judgment has a material adverse
effect on the Company's financial condition.
A supplier for QPI Consumer, the Brookwood Companies sued the Company in
December 1995 in Hillsborough County court in Tampa, Florida, for approximately
$150,000 for goods sold for use by QPI Consumer. The trial took place in May,
1997, and in June 1997, the Court awarded Brookwood judgment against the Company
for the full amount plus statutory interest from December 1995 for a total of
approximately $170,000 to the date of judgment. The Company intends to appeal,
but no assurance can be given that such appeal will be successful. Such judgment
has a material adverse effect on the Company's financial condition.
Various 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 the Company's business. None of the litigation matters
currently pending against the Company, aside from the matters specifically
discussed above, is deemed material by management of the Company.
Item 3. Default Upon Senior Securities
As of March 31, 1997, the Company was in default with respect to, among
other things, the financial covenants with respect to its bank indebtedness. The
aggregate amount of such indebtedness, all of which matured upon default, was
approximately $1.280 million.
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
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: July ___, 1997 By: /s/Bruce C. Weaver
------------------
Bruce C. Weaver
President (Principal Executive
Officer and Principal Financial
And Accounting Officer)