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, 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: August 3, 2000, 2,554,056
shares of common stock outstanding.
1
PART I - FINANCIAL INFORMATION
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
June 30, 2000
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 1,198,915
Trade accounts receivable, less
allowance for doubtful accounts, of $ 11,867 690,180
Inventories 881,477
Other Current Assets 79,431
-----------
Total Current Assets 2,850,003
Investments-long term 7,637
Property and Equipment 883,531
Less Accumulated Depreciation (721,909)
-----------
Property and Equipment, net 161,622
TOTAL ASSETS $ 3,019,262
===========
See notes to Consolidated Financial Statements
2
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
June 30, 2000
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 549,010
Accrued expenses 243,167
Customer deposits 213,184
Income taxes payable 9,307
Note payable, current 620,465
Note payable, related parties, current 380,000
------------
Total Current Liabilities $ 2,015,133
------------
NON-CURRENT LIABILITIES:
Notes payable, non-current $ 13,017
Notes payable, related parties, non-current 400,000
------------
Total non-current liabilities $ 413,017
------------
TOTAL LIABILITIES $ 2,428,150
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferredstock, 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 (24,436,225)
------------
Total stockholders' equity $ 591,112
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,019,262
============
See notes to Consolidated Financial Statements
3
QUALITY PRODUCTS, INC.
CONSOLIDATED
STATEMENT OF INCOME
(Unaudited)
For the nine months ended For the three months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Net Sales $ 5,360,941 $ 4,883,718 $ 1,863,442 $ 1,212,535
Cost of Goods Sold 3,297,116 3,264,390 1,132,911 846,108
----------- ----------- ----------- -----------
Gross Profit 2,063,825 1,619,328 730,531 366,427
Selling, General, & Admin Expenses 1,334,545 1,241,621 456,104 401,130
----------- ----------- ----------- -----------
Operating Income 729,280 377,707 274,427 (34,703)
Other Income (Expense):
Interest Expense (52,112) (73,689) (11,626) (23,639)
Interest Income 31,659 16,742 12,828 4,374
Other Income 5,365 4,582 475 3,382
----------- ----------- ----------- -----------
Total Other Income(Expense) (15,088) (52,365) 1,677 (15,883)
Income(Loss) Before Income Taxes 714,192 325,342 276,104 (50,586)
Income Taxes 34,437 767 20,573 4,500
----------- ----------- ----------- -----------
Net Income(Loss) $ 679,755 $ 324,575 $ 255,531 $ (55,086)
Earnings per share:
Basic earnings(loss) per common share(Note 4) $ 0.27 $ 0.13 $ 0.10 $ ( 0.02)
=========== =========== =========== =========
Diluted earnings(loss) per common share(Note 4) $ 0.27 $ 0.13 $ 0.09 $ ( 0.02)
=========== =========== =========== =========
See notes to Consolidated Financial Statements
4
QUALITY PRODUCTS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
For the nine months ended
June 30,
2000 1999
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net Income $ 679,755 $ 324,575
Adjustments to reconcile net income to net
cash provided by operating activities;
Depreciation and amortization 37,254 31,389
Cash provided by current assets and liabilities:
Restricted Cash -- 15,662
Accounts receivable 319,558 (104,484)
Inventories (299,568) 22,259
Other assets 16,482 23,207
Accounts payable 126,061 (109,695)
Accrued expenses (27,645) (3,912)
Customer Deposits (97,184) (288,115)
Income Taxes Payable 9,307 (2,000)
------------ ------------
Cash provided by operating activities $ 764,020 $ (91,114)
Cash Flows Used by Investing Activities:
Purchase of machinery & equipment (33,707) (40,985)
Purchase of investments (7,637) --
------------ ------------
Cash used for investing activities (41,344) (40,985)
Cash Flows From Financing Activities:
Borrowings-Bank Note -- 39,805
Principal Repayments-Bank Note (41,184) (30,555)
Principal Repayment - Debentures (150,000) (150,000)
------------ ------------
Cash used for financing activities (191,184) (140,750)
Net Increase (Decrease) in Cash 531,492 (272,849)
Cash at Beginning of Period 667,423 669,525
------------ ------------
Cash at End of Period $ 1,198,915 $ 369,676
============ ============
See notes to Consolidated Financial Statements
5
Cash Flow Information - continued
The Company's cash payments for interest and income taxes were as follows:
Nine Months Ended
June 30,
2000 1999
---- ----
Cash paid for interest 62,112 73,688
Cash paid for taxes 25,130 13,567
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 nine months ended June 30, 2000, are not necessarily indicative of
the results that may be expected for the year ended September 30, 2000.
2. Long-term Investments
During the three months ended June 30, 2000, the Company invested in
marketable equity securities deemed by management to be
available-for-sale. The securities are reported at fair value with net
unrealized gains and losses reported within stockholders' equity. For
the three months and nine months ended June 30, 2000 unrealized gains
and losses were immaterial.
3. Inventories
Inventories at June 30, 2000 consist of:
Raw materials and supplies $ 495,911
Work-in-process 359,783
Finished goods 25,783
----------
Total $ 881,477
==========
7
4. 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:
9 Months Ended 3 Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
BASIC:
Average Shares Outstanding 2,554,056 2,554,056 2,554,056 2,554,056
Net Income(Loss) $ 679,755 $ 324,575 $ 255,531 $ (55,086)
Basic Earnings(Loss) Per Share $ 0.27 $ 0.13 $ 0.10 $ (0.02)
8
Note 4 - continued
9 Months Ended 3 Months Ended
June 30, June 30,
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 0 251,224 0
Total Shares 2,554,056 2,554,056 2,805,280 2,554,056
Net Income(Loss), excluding interest
expense on convertible securities $ 679,755 $ 324,575 $ 258,531 $ (55,086)
Diluted Earnings(Loss) Per Share $ 0.27 $ 0.13 $ 0.09 $ (0.02)
Average Market Price
of Common Stock $ 0.7120 $ 0.4901 $ 1.1258 $ 0.4932
Ending Market Price
of Common Stock $ 0.9688 $ 0.5625 $ 0.9688 $ 0.5625
Certain options and warrants were excluded from the calculation of
diluted earnings per share at June 30, 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. The $2.00 options were
antidilutive for all periods reported, whereas the $1.00 options
were dilutive only for the 3 months ended June 30, 2000.
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. The $2.00 options were antidilutive
for all periods reported, whereas the $1.00 options were
dilutive only for the 3 months ended June 30, 2000.
3) Options granted to Company employees to purchase 150,000 shares
of the Company's common stock at $1.00 per share. The options
were dilutive only for the three months ended June 30, 2000.
9
Note 4 - continued
4) Notes convertible into 533,333 shares of common stock at $0.75 per
share. The convertible shares were dilutive only for the three
months ended June 30, 2000.
5. Notes Payable
Maturities of notes payable for the 5 years succeeding June 30, 2000 are:
2001 $ 1,000,465
2002 413,017
-----------
Total $ 1,413,482
===========
6. Income Taxes
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at June 30, 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 $(119,000) in the period ended
June 30, 2000 and increased approximately $22,000 in the period ended June 30,
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 June 30, 2000, the Company had net operating loss carryforwards for Federal
and State income tax purposes of approximately $28,157,000 and $29,136,000,
respectively, which is available to offset future taxable income, if any,
through 2010.
7. New Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and displaying comprehensive income and its components in financial
statements. The Company adopted the provisions of SFAS No. 130 in 1999. Gross
unrealized gains and losses on available-for-sale securities were immaterial for
the nine months ended June 30, 2000.
8. Subsequent Events
The lease for the Company headquarters expired on June 30, 2000. The Company is
currently negotiating terms of an extension to the lease, allowing operations to
continue in the same facility. The lease is expected to be finalized in August
2000 and no interruption of operations is anticipated.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 as Compared to June 30, 1999
Net Sales for the three months ended June 30, 2000 were $1,863,442 compared to
$1,212,535 for the three months ended June 30, 1999, an increase of $650,907 or
53.7%. Gross profit was $730,531 or 39.2% of sales compared to $366,427 or 30.2%
of sales for the same period a year earlier. Sales increased because the Company
did not experience the slowdown in new orders that it incurred last year during
its second fiscal quarter. The Company started the current period with a backlog
of $1.2 million versus $723,000 to begin the period last year. The Company
shipped 60 units in the current period compared to 51 units in the same period
last year. The Company maintains a strong backlog of approximately $1.3 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 September 30, 2000 to be approximately $1.7
million.
Selling, general and administrative expenses for the three months ended June 30,
2000 were $456,104 compared to $401,130 for the three months ended June 30,
1999, an increase of $54,974 or 13.7%. Approximately $23,000 of the increase is
due to increased benefits expenses as the Company attempts to remain competitive
in the labor market. The remaining increase of approximately $32,000 represents
non-recurring expenses for the investigation of new business opportunities.
Selling, general and administrative expenses as a percentage of sales decreased
to 24.5% during the three months ended June 30, 2000 compared to 33.1% for the
three months ended June 30, 1999. The percentage is expected to remain constant
in the next period.
Net interest income for the three months ended June 30, 2000 was $1,202 as
compared to net interest expense of $19,265 for the comparable period a year
earlier. The decrease is due to the reduction of the principal on the Company's
outstanding indebtedness, the reversal of $8,000 of previously accrued interest,
which was not realized, and the increased interest earned on the Company's cash.
The Company currently has $1,150,000 of 6% debt represented by $950,000 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
non-interest bearing as of March 1, 1998.
Net income for the period was $255,531 compared to a net loss of $(55,086)
during the corresponding period a year earlier, an increase of $310,617. Net
income is expected to remain consistent in the next period.
The income tax provision in the three months ended June 30, 2000 includes a
benefit related to utilization of NOL carry forwards of approximately $119,000.
The period ended June 30, 1999 included no benefit related to the utilization of
NOL carryforwards. The 2000 provision relates to the Company's federal and city
income taxes. The 1999 provision relates only to city income taxes.
11
Nine Months Ended June 30, 2000 as Compared to June 30, 1999
Net sales for the nine months ended June 30, 2000 were $5,360,941 compared to
$4,883,718 for the nine months ended June 30, 1999, an increase of $477,223 or
9.8%. Gross profit was $2,063,825 or 38.5% of sales compared to $1,619,328 or
33.2% of sales for the same period a year earlier. Sales increased because the
Company did not experience the slowdown in new orders, which it incurred in the
second quarter of fiscal 1999. 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 September 30, 2000 to be approximately $1.7 million.
Selling, general and administrative expenses for the nine months ended June 30,
2000 were $1,334,545 compared to $1,241,621 for the nine months ended June 30,
1999, an increase of $92,924 or 7.5%. The increase is primarily due to
non-recurring expenses for the investigation of new business opportunities.
Selling general and administrative expenses as a percentage of sales decreased
to 24.9% during the nine months ended June 30, 2000 compared to 25.4% for the
nine months ended June 30, 1999. The percentage decrease is primarily due to the
increased sales for the nine months. The percentage is expected to remain
constant in the next period.
Net interest expense was $20,453 for the nine months ended June 30, 2000
compared to $56,947 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 $1,150,000 of 6% debt represented by $950,000 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
non-interest bearing as of March 1, 1998.
Net income for the period was $679,755 compared to $324,575 during the
corresponding period a year earlier, an increase of $355,180 or 109.4%. The
increase is primarily related to the significant improvement in gross profit.
Net income is expected to remain consistent in the next period.
The income tax provision for the period ending June 30, 2000 and 1999 includes a
benefit related to utilization of NOL carry forwards of approximately $306,000
and $140,000, respectively. The 2000 provision relates to federal and city
income taxes.
12
Liquidity and Capital Resources
As of June 30, 2000, the Company had a working capital surplus of $834,870 as
compared to a working capital surplus of $1,040,937 at June 30, 1999 and a
working capital surplus of $1,102,770 at September 30, 1999. The decrease is due
to the transition of a majority of the Company's non-current debt into current
liabilities, as the debt is now due within one year. However, the surplus should
increase as the Company anticipates continuing cash flow from profitable
operations in the future. The Company's major source of liquidity continues to
be from operations.
The Company is evaluating various options for disposing of its short-term debt,
which is due in December 2000.
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: August 3, 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