U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1996
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 March 31, 1996 there were 2,395,680 shares of the Company's common stock
outstanding.
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31,
1996
(Unaudited)
ASSETS
Current Assets
Cash $ 458,239
Certificate of Deposit (Note B) 144,728
Accounts receivable from liquidation (Note C) 506,149
Accounts receivable 636,170
Inventories 809,647
Other current assets 6,190
Total Current Assets 2,561,123
Property, plant and equipment: 854,103
Less accumulated depreciation 807,868
Net property, plant and equipment 46,235
TOTAL ASSETS $2,607,358
See accompanying notes
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QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31,
1996
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Bank Indebtedness $2,352,310
Accounts Payable 751,261
Accrued expenses 220,264
Due to related party 81,979
Total Current Liabilities 3,405,814
Long-term unsecured note payable 500,000
Total Long-Term Liabilities 500,000
TOTAL LIABILITIES 3,905,814
Commitments and Contingencies (Note D)
STOCKHOLDERS' EQUITY
Preferred stock, convertible, voting,
par value $.00001, authorized 10,000,000
shares,issued and outstanding 25
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) (26,191,105)
3,727,516
Less:
Treasury stock, 255,708 shares (5,025,972)
Total Stockholders Equity (deficiency) (1,298,456)
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 2,607,358
See accompanying notes
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QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the six months ended For the three months ended
March 31, 1996 March 31, 1996
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 2,408,085 $ 18,665,193 $ 1,225,697 $ 10,313,820
Cost of Goods Sold 1,651,138 18,162,586 $ 827,925 9,962,878
Gross Profit 756,947 502,607 397,772 350,942
Selling, General, & Administrative Expenses 923,021 3,869,404 450,983 2,202,602
Operating Income (loss) (166,074) (3,366,797) (53,211) (1,851,660)
Other Income or (Expense)
Interest Expense (344,046) (375,984) (115,057) (265,117)
Litigation Settlement Expense (652,929) -- (586,229) --
Litigation Judgement Expense (42,012) -- -- --
Other (10,215) (641,802) (4,881) (643,799)
Total Other Income (Expense) (1,049,202) (1,017,786) (706,167) (908,916)
Income (Loss) Before Income Taxes (1,215,276) (4,384,583) (759,378) (2,760,576)
Income Tax Expense (Benefit)
Net Income (loss) ($ 1,215,276) ($ 4,384,583) ($ 759,378) ($ 2,760,576)
Per Common Share Data:
Net income (loss) before income taxes ($ 0.61) ($ 2.23) ($ 0.38) ($ 1.40)
Net income (loss) ($ 0.61) ($ 2.23) ($ 0.38) ($ 1.40)
Weighted average used in per share calculations 1,976,931 1,968,042 1,976,931 1,973,080
See accompanying notes
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QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended
March 31,
1996 1995
(Unaudited) (Unaudited)
Cash Flows From Operating Activities
Net Income (Loss) ($1,215,276) ($4,384,583)
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization 8,986 609,134
Provision for Bad Debts -- 119,500
Impairment reserve - assets held for sale -- 650,000
Stock Compensation 20,937 35,000
Certificates of deposit (1,596) (151,679)
Accounts receivable (147,854) (2,817,277)
Inventories (27,169) 1,650,076
Other Assets 1,710 37,157
Accounts payable (14,781) 2,892,260
Income taxes -- 141,000
Accrued expenses 19,537 662,004
Deferred rent expense -- (290,000)
Due to related party 81,979 --
Cash used in operating activities $(1,273,527) (847,408)
Cash Flows From Investing Activities:
Capital expenditures (17,574) (546,841)
Proceeds from sale of assets held for sale -- 648,608
Stock acquired - asset held for sale -- (279,675)
Accounts receivable from liquidation 4,322,573
Cash provided by (used in) investing activities 4,304,999 (177,908)
Cash Flows From Financing Activities:
Repayment to Officer (333,202) --
Net borrowings (repayments) -short term -- 1,456,213
Repayments - Notes payable (4,106,908) (448,806)
Unsecured Note Payable issued 500,000 --
Cash provided by (used in) financing activities (3,940,110) 1,007,407
Net increase (decrease) in cash 364,889 (17,909)
Cash at Beginning of Period 93,350 17,909
Cash at End of Period $ 458,239 $ --
See accompanying notes to condensed financial Statements
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QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended March 31, 1995
Common Additional Amounts Total
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
Stock Issuance:
Officer severance 10,000 $35,000 $35,000
Net Loss (4,384,583 ) (4,384,583 )
As of March 31, 1995 1,976,931 $20 ($5,025,972) $29,897,664 ($60,103) ($10,832,157) $13,979,452
See accompanying notes to condensed financial statements
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QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Six Months Ended March 31, 1996
Common Additional Total
Stock Treasury Paid-In Retained Stockholders'
Shares Amount Stock Capital Earnings Equity
As of September 30, 1995 1,976,931 20 (5,025,972) 29,897,664 (24,975,829) (104,117)
Stock Issuance:
Bonus 418,749 $4 $20,933 20,937
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 to condensed financial statements
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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 and six months ended March
31, 1996, are not necessarily indicative of the results that may be expected for
the year ended September 30, 1996.
Note B. Certificate of Deposit
A Certificate of Deposit in the amount of $141,400 provides collateral for a
Letter of Credit issued to an Insurance carrier to secure the Company's
potential obligations under its Workman's Compensation Plan. Any excess above
$141,400 represents accrued interest which is available for regular Company use.
Note C -- Accounts 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 March 31, 1996 the net amount receivable from liquidation and disposal was
$506,149 represented by:
Accounts Receivable 538,533
Inventory 312,557
Fixed Assets 250,000
Patents 40,443
1,141,533
Less:
Subordinated Secured Creditor 164,369
SBA Loan --
Liquidation Costs 471,015
$ 506,149
Note D - Commitments and Contingencies
During the three months ended March 31, 1996, the Company has recorded the
settlement of its largest contingent claim by issuing a five year unsecured
$500,000 convertible promissory note due August 31, 2001 to PI, Inc. The note is
convertible at the Company's option into common shares at between $0.75 and
$1.00 per share depending on the market price per share of the Company's shares.
The note is convertible at the holder's option between $0.75 and $1.00 per share
subject to the market price of the Company's common shares at the time of
conversion, and the number of shares to be received by the Holder will not be
less than 12.5% of the Company's fully diluted shares after giving effect to the
conversion.
The Company also recorded the settlement of the contract with its former
President and CEO, Thomas Raabe during the period with cash payments totaling
$75,000, the issuance of 139,583 shares at $0.05/share, and the forgiveness of a
loan in the amount of $18,750.
Two class action suits against the Company were administratively dissolved
during the quarter, and to the Company's knowledge have not been reopened.
The above amounts have been recorded as litigation settlement expense during the
three months ended March 31, 1996.
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For further information on commitments and contingencies please see Part II,
Item I.
Note E
The Company's non-cash investing and financing activities and cash payments for
interest and income taxes were as follows:
Six Months Ended Three Months Ended
March 31, March 31,
1996 1995 1996 1995
Cash paid for interest $344,046 375,984 115,057 233,143
Common Stock issued for
Officer /Employee bonuses 13,958 -- 13,958 --
Officer Severance 6,979 35,000 6,979 35,000
Note F -- Reclassification
Certain amounts for 1995 have been reclassified to conform with the 1996
presentation.
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MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Six Months Ended March 31, 1996 Compared to Six Months Ended March 31, 1995
Consolidated net sales for the six months ended March 31, 1996 were
$2,408,085 as compared to $18,665,193 a year earlier. The decrease in sales was
due to the discontinuance of operations at Technical Metals Company and also at
QPI Consumer Products Corporation which was liquidating under protection of
Chapter 11. The only remaining operating subsidiary during this period was QPI
Multipress Inc. ("Multipress"). Sales for Multipress for the six months ended
March 31, 1996 were $2,408,085 as compared to $2,692,779 for the comparable
period a year ago, a decrease of approximately 11%.
Despite the significant drop in overall sales year to year, gross
profit increased during the period, due to the discontinuance of operations at
Technical Metals and QPI Consumer Products which had been generating low or
negative gross margins. Gross profit during the period was $756,947 or 31% of
sales as compared to $502,607 or 3% of sales during the period ended March 31,
1995.
Selling, general and administrative expenses were $923,021 for the six
months ended March 31, 1996 compared with $3,869,404 for the comparable period
ending a year earlier. Selling, general and administrative expenses for the
comparable period in 1995, excluding expenses relating to Technical Metals and
QPI Consumer Products were $1,122,586. The decrease was due to overhead
reductions at the corporate level which were initiated during the last three
months of the six month period ending March 31, 1996.
Interest Expense was $344,046 for the six months ended March 31, 1996
as compared to $375,984 for the six month period ended March 31, 1995. For the
first three months of the year, the outstanding principal balance was higher
than that during the corresponding period a year prior, and the interest rate
was higher than the previous year at prime plus 3%. However, during the second
quarter of 1996, the outstanding principal balance of bank indebtedness was
being reduced to lower levels than the previous year and the interest rate was
reduced to prime plus 1%, resulting in an overall interest charge approximately
equal to the prior year's comparable six month period.
Certain litigation that was settled in the fourth quarter of fiscal
1996 has been retroactively shown in the six month period ending March 31, 1996.
The most significant is the PI, Inc. v. Quality Products, Inc. lawsuit that was
settled August 31, 1996 by issuing to PI a $500,000 unsecured promissory note
due August 31, 2001. This was recorded during the six month period ended March
31, 1996 as a litigation settlement expense and was the main component of the
$652,929 charge for the period, compared to no charge for the year prior.
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The net loss for the six months ended March 31, 1996 was $1,215,276 as
compared to $4,384,583 during the corresponding period in the prior year. This
reduction was due to the discontinuance of the unprofitable subsidiaries. The
comparable figure for the six months ended March 31, 1995, excluding Technical
Metals and QPI Consumer Products, was a loss of $565,639, lower than the current
six month period by $649,537, due primarily to the litigation settlement expense
of $652,929 which the Company has treated as having been incurred during the
period ending March 31, 1996.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
Consolidated net sales for the three months ended March 31, 1996 were
approximately $1,225,697 as compared to $10,313,820 for the three month period
ended March 31, 1995. The decrease in sales was due to the discontinuance of the
operations of QPI Consumer Products and Technical Metals, leaving Multipress as
the only active operating subsidiary during this period. Sales for Multipress
for the three months ended March 31, 1996 were $1,225,697 as compared to
$1,085,903 for the corresponding period in the prior year.
Gross Profit was $397,772 for the three months ended March 31, 1995 as
compared to $350,942 for the same period a year earlier. Gross profit improved
due to the elimination of results from the unprofitable subsidiaries. All of the
gross profit for the three months ended March 31, 1996 was generated by
Multipress. Comparable gross profit for the same period a year earlier was
$396,620.
Selling, general and administrative expenses were $450,983 or 36% of
sales during the second quarter as compared to $2,202,602 or 21% of sales a year
earlier. Selling, general and administrative expenses as a percentage of sales
were higher for the period ended March 31, 1996 as compared to the period ended
March 31, 1995, because of the continued time lag between the discontinuance of
the operating activities and the resulting immediate drop in sales and the
elimination of the expenses. Additionally, legal fees continued to increase as
lawsuits in which the Company was a defendant escalated further during the
quarter.
Selling, general and administrative expenses as a percentage of sales
were 36% in the second quarter of fiscal 1996 as compared to 40% in the first
quarter of fiscal 1996 despite an increase of sales of $45,000 or 4% in the
second quarter. This was due to reductions made in corporate overhead during the
three months ended March 31, 1996. Selling, general and administrative expenses
will decrease in the next quarters as the cost reductions associated with the
liquidated subsidiaries comes into effect and cuts made in corporate overhead
continue.
Interest expense was $115,057 for the three months ended March 31, 1996
as compared to $265,117 for the corresponding period in the prior year. This was
due to the reductions in the principal amount of secured bank debt made during
the quarter as a result of the continued sale and liquidation of the assets of
Technical Metals and QPI Consumer Products. The interest expense of $115,057
during the second quarter was significantly lower than interest expense of
$228,989 during
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the first quarter of fiscal 1996. Interest expense will continue to decline over
at least the next quarter as the amount of outstanding indebtedness will
continue to decline as the remaining assets of Technical Metals and QPI Consumer
Products are sold off. Also, during the quarter ended March 31, 1996 the Company
renegotiated as part of an overall workout agreement with its lender, the
interest rate charged on its outstanding indebtedness from prime plus 3% to
prime plus 1%.
Liquidity and Capital Resources
Working capital at March 31, 1996 was a deficiency of $844,691, as
compared to a working capital deficiency of $603,730 at December 31, 1995. Cash
used in operating activities was $1,273,527 as compared to cash used in
operating activities of $847,408 for the period ended a year earlier. The most
significant source of cash generated during the period was cash of $5,596,100
from the liquidation of the subsidiary companies, primarily Technical Metals
Company which had sold and liquidated substantially all of its assets by
March 31, 1996. During the quarter ended March 31, 1996 an agreement was reached
with its secured lender whereby the Company was granted an extension of time
until August 15, 1996 to restructure, provided that proceeds from the
liquidation were used to pay down the bank line.
Accordingly, the principal use of cash during the period was to reduce secured
bank debt. In the six months ended March 31, 1996, approximately $4,100,000 was
paid toward reducing bank debt, $3,100,000 in the second quarter alone.
Although the Company had negotiated a workout agreement with its secured lender
providing the Company with some time to improve its working capital position,
uncertainty continued. The Company continued to push ahead with its staff and
cost reductions, sales of assets of liquidated subsidiaries and the
renegotiation and extension of other outstanding indebtedness and obligations.
Despite this however, outside sources of financing remained unavailable and
there continued to be no assurances that the company could successfully complete
the steps needed to continue operations.
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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
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could materially adversely effect the Company's financial condition.
During fiscal 1995, a creditor of QPI Consumer, the Brookwood
Company threatened to sue the Company for approximately $130,000 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 March 31, 1996, 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 $2.352 million.
ITEM 6 - EXHIBITS AND REPORTS OF FORM 8-K
a). Exhibits
2.1 - Forbearance and Collateral Liquidation Agreement Dated as of
March 15, 1996 (including related mutual release agreement)
4.1 - Promissory Note Dated August 31, 1996 issued to PI, Inc.
10.2 - Workout Agreement by and among the Company, The Provident
Bank et. al
27.1 - Financial Data Schedule
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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)
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