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 PART I - FINANCIAL INFORMATION QUALITY PRODUCTS, INC. CONSOLIDATED BALANCE SHEET March 31, 2000 (Unaudited) ASSETS 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 ========== See notes to Consolidated Financial Statements 2 QUALITY PRODUCTS, INC. CONSOLIDATED BALANCE SHEET - CONTINUED March 31, 2000 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY 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 ============ See notes to Consolidated Financial Statements 3 QUALITY PRODUCTS, INC. CONSOLIDATED STATEMENT OF INCOME (Unaudited) For the six months ended For the three months ended March 31, March 31, 2000 1999 2000 1999 ---- ---- ---- ---- 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) ============= ============= ========== ========= See notes to Consolidated Financial Statements 4 QUALITY PRODUCTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the six months ended March 31, 2000 1999 (Unaudited) (Unaudited) 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 ======== ========== See notes to Consolidated Financial Statements 5 Cash Flow Information - continued The Company's cash payments for interest and income taxes were as follows: Six Months Ended March 31, 2000 1999 ---- ---- Cash paid for interest 42,486 50,050 Cash paid for taxes 6,512 9,067 6 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: Raw materials and supplies $509,283 Work-in-process 317,057 Finished goods 32,251 ----------- Total $ 858,591 ========= 7 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: 6 Months Ended 3 Months Ended March 31, March 31, 2000 1999 2000 1999 ---- ---- ---- ---- 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 8 Note 3 - continued 6 Months Ended 3 Months Ended March 31, March 31, 2000 1999 2000 1999 ---- ---- ---- ---- 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 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 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 4. Notes Payable Maturities of notes payable for the 5 years succeeding March 31, 2000 are: 2001 $1,049,453 2002 426,680 ---------- Total $1,476,133 ========== 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 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 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 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 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 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