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, 1995 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 No X As of December 31, 1995 there were 1,976,931 shares of the Company's common stock outstanding. -1- QUALITY PRODUCTS, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 (UNAUDITED) ASSETS Current Assets Cash $ 261,837 Certificate of Deposit (Note B) 143,938 Accounts receivable from liquidation (Note C) 4,173,959 Accounts receivable 551,217 Inventories 732,348 Other current assets 817 ------------- Total Current Assets 5,864,116 Property, plant and equipment: 848,031 Less accumulated depreciation 804,316 ------------- Net property, plant and equipment 43,715 -------------- TOTAL ASSETS $ 5,907,831 ============== See accompanying notes -2- QUALITY PRODUCTS, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 (UNAUDITED) LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY) Current Liabilities Bank Indebtedness 5,435,239 Accounts Payable 852,396 Accrued expenses 180,211 Due to officer -- ------------ Total Current Liabilities 6,467,846 ------------ TOTAL LIABILITIES 6,478,846 Commitments and Contingencies (Note D) STOCKHOLDERS' EQUITY Preferred stock, par value $.000001 authorized 10,000,000 shares, issued and outstanding 25 -- Common stock, $.00001 par value, authorized 20,000,000 shares, issued and outstanding 1,976,931 shares 20 Additional paid-in capital 29,897,664 Retained earnings (deficit) (25,431,727) -------------- 4,465,957 Less: Treasury stock, 255,708 shares (5,025,972) ------------- Total Stockholders Equity (Deficiency) (560,015) TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 5,907,831 ============= See accompanying notes -3- QUALITY PRODUCTS, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended December 31, 1995 1994 ---- ---- (Unaudited) (Unaudited) Net Sales $ 1,182,388 $ 8,351,373 Cost of Goods Sold 823,213 8,199,708 --------------- ---------------- Gross Manufacturing Profit 359,175 151,665 Selling, General, & Administrative Expenses 472,038 1,666,802 --------------- ---------------- Operating Income (Loss) (112,863) (1,515,137) Other Income or (Expense) Interest Expense (228,989) (110,867) Litigation Settlement Expense (66,700) -- Litigation Judgement Expense (42,012) -- Other (5,334) 1,997 --------------- ---------------- Total Other Income (Expense) (343,035) (108,870) Income (Loss) Before Income Taxes (455,898) (1,624,007) Net Income (Loss) ($455,898) ($1,624,007) =============== ================= Earnings (loss) per share Net Income(Loss) ($0.23) ($0.83) =============== ================= Weighted average common and equivalent shares 1,976,931 1,966,931 =============== ================= See accompanying notes -4- QUALITY PRODUCTS, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 1994 ---- ---- (UNAUDITED) (UNAUDITED) Cash Flows From Operating Activities: Net Income (Loss) ($455,898) ($1,624,007) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization $7,242 302,179 Cash provided by (used for) current assets and liabilities: Accounts receivable (62,901) (787,598) Inventories 50,130 (928,212) Other assets 7,083 49,457 Income Taxes receivables - (9,000) Accounts payable 86,354 1,767,174 Accrued expenses (20,516) 188,018 Amounts receivable from liquidation 1,928,290 - Certificates of deposit (806) Cash provided for (used by) operating ---------------- -------------- activities (389,312) (1,041,989) Cash Flows From Investing Activities: Acquisition of subsidiary, net of cash acquired - Purchase of machinery & equipment (1,914,980) (326,198) ---------------- -------------- Cash provided by (used for) investing activities 1,914,980 (326,198) Cash Flows From Financing Activities: Repayments - notes payable (1,023,979) (32,274) Net borrowings (repayments) -short term - 1,382,552 Repayment to officer (333,202) - --------------- --------------- Cash provided by (used for) financing activities (1,357,181) 1,350,278 Net Increase (Decrease) in Cash 168,487 (17,909) Cash at Beginning of Period 93,350 17,909 --------------- --------------- Cash at End of Period $261,837 $ - =============== =============== See accompanying notes to condensed financial Statements -5- QUALITY PRODUCTS, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED DECEMBER 31, 1994 Additional Amounts Total Common Stock Treasury Paid-In Due From Retained Stockholders' Shares Amount Stock Capital Officers Earnings Equity ------ ------ ----- ------- -------- -------- ------ AS OF SEPTEMBER 30, 1994, 1,966,931 $20 ($5,025,972) $29,862,664 ($60,103) ($6,447,574) $18,329,035 Net Loss (1,624,007) (1,624,007) ---------- ------- ------------ ------------ ---------- ------------- ----------- AS OF DECEMBER 31, 1994 1,966,931 $20 ($5,025,972) $29,862,664 ($60,103) ($8,071,581) $16,705,028 ========== ======= ============ ============ ========== ============= =========== See accompanying notes to condensed financial statements -6- QUALITY PRODUCTS, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 Additional Amounts Total Common Stock Treasury Paid-In Due From Retained Stockholders' Shares Amount Stock Capital Officers Earnings Equity ------ ------ ----- ------- -------- -------- ------ AS OF SEPTEMBER 30, 1995 1,976,931 20 (5,025,972) 29,897,664 (24,975,829) (104,117) Net Loss (455,898) (455,898) ----------- ------- ----------- ------------ ---------- -------------- ----------- AS OF DECEMBER 31, 1995 1,976,931 $20 ($5,025,972) $29,897,664 ($25,431,727) ($560,015) =========== ======== =========== =========== ========== ============== =========== See accompanying notes to condensed financial statements -7- QUALITY PRODUCTS, INC. & SUBSIDIARIES NOTES TO CONDENSED 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, 1995, 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 three months, ended December 31, 1995, are not necessarily indicative of the results that may be expected for the year ended September 30, 1996. Note B - Certificate of Deposit The 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 May 1, 1996 and has a renewal date for valuation purposes of November 1, 1996. Note C -- Account Receivable from liquidation In late fiscal 1995, as disclosed more completely in the Company's report on Form 10-KSB for the year-ended September 30, 1995, Technical Metals Company and QPI Consumer Products Corporation, two of the Company's subsidiaries, were being wound down and their assets were being liquidated. The assets and liabilities of these subsidiaries are not included in the Company's consolidated financial statements but rather are shown as a one line item on the balance sheet as "accounts receivable from liquidation" at that particular point in time. -8- As at December 31, 1995 the net amount receivable from liquidation and disposal was $4,173,959 represented by: Accounts Receivable $3,464,617 Inventory 1,103,856 Fixed Assets 2,002,835 Patents 40,443 ---------- $6,611,751 Less: Subordinated Secured Creditor 936,000 SBA Loan 373,288 Liquidation Costs 1,128,504 ---------- $4,173,959 ========== Note D - Commitments and Contingencies During the three months ended December 31, 1995 the Company incurred two judgments against it totaling $42,012. This has been recorded as accrued contingent expense during the period. Additionally, the Company settled litigation against it by certain lessors and creditors by recording settlements during the quarter in the amount of $66,700. These amounts are to be paid over the remainder of fiscal 1996 and in some cases the first three quarters of fiscal 1997. For additional information on these and other contingencies and commitments please refer to Part II, Item 1 entitled legal proceedings. Note E -- Cash Flow Information The Company's non-cash investing and financing activities and cash payments for interest and income taxes were as follows: Three Months Ended December 31, 1995 1994 ---- ---- Cash paid for interest $228,989 $110,867 Common Stock issued for Officer /Employee bonuses -- -- Note F -- Reclassification Certain amounts for 1994 have been reclassified to conform with the 1995 presentation. -9- MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended December 31, 1995 as Compared to December 31, 1994 By the end of the quarter ended December 31, 1995, the sole operating subsidiary of the Company was QPI Multipress Inc. ("Multipress"), a manufacturer of hydraulic presses. Technical Metals Company was winding down and in the initial stages of liquidation and disposal of its assets. An involuntary bankruptcy petition was filed against QPI Consumer Products Corporation (QPI Consumer) on or about August 23, 1995 and QPI Consumer filed a voluntary bankruptcy petition on October 19, 1995 in order to have an orderly liquidation of its business. As a result, net sales for the three months ended December 31, 1995 were $1,182,388 compared with $8,351,373 for the three months ended December 31, 1994. Gross profit was $359,125, or 30% of sales, versus $151,665, or 2% of sales, a year earlier. Gross profit improved because of the discontinuation of Technical Metals and QPI Consumer, as those subsidiaries generated narrow or negative gross margins. Selling, general and administrative expenses decreased to $472,038 for the three months ended December 31, 1995 compared with $1,666,802 for the three months ended December 31, 1994, due to the discontinuance of the operations of Technical Metals and QPI Consumer. Selling, general and administrative costs constituted 40% of sales for the period ended December 31, 1995 as compared to 20% of sales from the corresponding period in the prior year. Selling, general and administrative expenses were a disproportionately higher percentage of sales for the period ended December 31, 1995, because of the time lag between the discontinuation of the operating activities and the resulting immediate drop in sales and the elimination of the expenses. Additionally, legal fees increased significantly as the number of lawsuits against the Company had increased significantly, and other professional fees increased as consultants were retained to assist the Company with the liquidations of Technical Metals and QPI Consumer and the Company's other liquidity problems. It is anticipated that selling, general and administrative expenses will decrease in the ensuing quarters as the cost reductions associated with the liquidated subsidiaries come into effect and professional and legal expenses are reduced as problems are gradually resolved and legal proceedings are settled or terminated. Selling, general and administrative expenses as a percentage of sales is also expected to decrease as sales are expected to remain stable over the next quarters while such expenses decrease. Interest expense for the three months ended was $228,989 as compared with $110,867 for the three months ended December 31, 1994. This increase is due to a higher debt level than during the comparable period a year earlier as well as a much higher interest rate and the payment of -10- facility fees. It is expected that interest expense will decline over the next two to three quarters as the amount of outstanding indebtedness is expected to be reduced from the proceeds of the liquidation of Technical Metals and QPI Consumer. During early 1996, the Company was also in negotiations with its lender to try to reduce the interest rate being charged on the loan and the amount of the monthly facility fee. The net loss for the period was $455,898 as compared with $1,624,007 for the corresponding period in the prior year. The decrease is due primarily to the discontinuation of the money losing operations of Technical Metals and QPI Consumer. Liquidity and Capital Resources During the quarter, cash used in operating activities, was $389,312 as compared to $1,041,989 of cash used for the quarter ended December 31, 1994. The use of cash was predominantly due to the loss for the period of $455,898 and the increase in accounts receivable of $62,901. Very little cash was used during the quarter for investing activities other than fixed asset purchases by QPI Multipress, Inc. totaling $13,310. The majority of the cash generated during the quarter was from the liquidation of the two subsidiaries totalling 1,928,250 which primarily went towards paying down the secured lender $1,023,979 and repaying to the secured lender an amount due to former officer James Renaldo of $333,202. This latter amount had been borrowed by the officer from the secured creditor and the proceeds had been lent to the Company in 1994 for its stock buyback program. As of December 31, 1995, the Company had a working capital deficit of $603,730. The Company had approximately $5.435 million in bank debt. In addition, the Company had obligations under certain long-term leases with respect to real property. A number of creditors of the discontinued subsidiaries had commenced litigation against the Company, and certain suppliers for Multipress expressed hesitation in continuing to extend credit to Multipress or the Company. The Company required substantial additional funds (or an improved cash position) to continue operations. To increase the availability of funds, the Company anticipated that it would attempt to (i) reduce staff and overhead costs, (ii) sell additional assets, (iii) reduce, renegotiate or otherwise extend the bank indebtedness, and (iv) renegotiate, extend, or settle other outstanding indebtedness or obligations. (The Company did not anticipate that other sources of financing will be available.) No assurances can be given that these steps will be taken or that if taken, will be sufficient to allow the Company to continue operations. -11- PART II ITEM 1. LEGAL PROCEEDINGS In early 1995, two putative class action and derivative action lawsuits (one by Bruce Daigle (who subsequently became a director of the Company) and the other by Bruce Balch) were filed against the Company and James Renaldo in the United States District Court for the Middle District of Florida, Tampa Division. Both complaints alleged the Company violated federal securities laws and Delaware law in connection with a proposed merger between the Company and Exsorbet, Inc. which merger was subsequently abandoned and that various publicly filed documents and press releases were misleading. In 1996, both cases were dismissed. In March 1995, PI, Inc., sued the Company and its former president, James Renaldo, in the Untied States District Court for the Southern District of New York for the Company's failure to register shares of restricted stock issued to PI, Inc. in connection with a 1993 merger between the QPI Consumer and PI, Inc.'s subsidiary PI Consumer Products Corporation. The complaint was dismissed in December 1995 against the Company and Renaldo. In 1996, PI sued the Company on similar grounds in the United States District court for the Middle District of Florida, Tampa Division. The action was settled in August 1996, with the Company issuing PI a $500,000 long term 6% note, which is convertible by PI into the Company's common stock at $.75 to $1.00 per share. In March 1995, Howard S. Klein sued the Company in the United States District Court, Eastern District of Pennsylvania for alleged lost profits on Company stock he purchased from 1989-1993, plus actual losses incurred. On October 3, 1996, the Court granted the Company summary judgment and dismissed the case against the Company. The plaintiff has appealed to the United States Court of Appeals for the Third Circuit. The appeal has been briefed and is scheduled for argument in June 1997. The Company believes the plaintiff's claims are meritless. 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; (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 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. Such liability could materially adversely effect the Company's financial condition. -12- During fiscal 1995, a creditor of QPI Consumer, the Brookwood Company threatened to sue the Company for approximately $130,000 of goods sold to QPI Consumer. Brookwood subsequently sued the Company in state court in Tampa, Florida, and trial is scheduled for May, 1997. While the Company believes its defenses are valid, a loss of such litigation could have a material adverse affect upon 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 businesses. None of the litigation matters currently pending against the Company, standing alone, aside from the matters specifically discussed above, is deemed to be material by management of the Company. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. As of December 31, 1995, 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 $5.434 million. ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K Exhibits 27.1. Financial Data Schedule Reports on Form 8-K A report on Form 8-K was filed on October 17, 1995, reporting: (a) Under Item 1, the bankruptcy of subsidiary QPI Consumer Products Corporation under Chapter 11 of the United States Bankruptcy Code, and Under Item 5, a change in the Board of Directors of the Company. -13- 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: March 31, 1997 By /s/ Bruce C. Weaver ---------------------------- Bruce C. Weaver President (Principal Executive Officer and Principal Financial And Accounting Officer) -14-