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, 1998
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.
(I) Yes X No
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As of March 31, 1998, there were 2,554,056 shares of the Company's common stock
outstanding.
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1998
(Unaudited)
ASSETS
Current Assets
Cash $ 686,507
Restricted Cash 15,488
Accounts Receivable, Net 618,557
Inventories 821,418
Other Current Assets 184,711
----------
Total Current Assets 2,326,681
----------
Property, Plant and Equipment 848,766
Less Accumulated Depreciation (815,707)
----------
Net Property, Plant and Equipment 33,059
----------
Other Assets 3,320
----------
TOTAL ASSETS $2,363,060
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----------
See notes to Consolidated Financial Statements
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
March 31, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Note payable, current $ 200,000
Accounts payable 424,736
Accrued expenses 314,810
Customer deposits 282,799
Income Taxes payable 12,433
-----------
Total Current Liabilities 1,234,778
-----------
NON-CURRENT LIABILITIES:
Notes payable, non-current 1,200,000
Notes payable, related parties, non-current 400,000
-----------
Total non-current liabilities 1,600,000
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
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; 808,333 shares reserved
Additional paid in capital 30,053,327
Accumulated deficit (25,499,098)
Less: Treasury stock, 176,775 shares at cost (5,025,972)
-----------
Total stockholders' deficit ($471,718)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,363,060
-----------
-----------
See notes to Consolidated Financial Statements
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
For the six months ended For the three months ended
March 31, March 31,
------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net Sales $3,441,407 $3,133,942 $1,709,992 $1,753,305
Cost of Goods Sold 2,245,412 1,954,397 1,109,876 1,084,238
---------- ---------- ---------- ----------
Gross Manufacturing Profit 1,195,995 1,179,545 600,116 669,067
Selling, General, & Admin Expenses 817,896 611,824 425,574 283,971
---------- ---------- ---------- ----------
Operating Income 378,099 567,721 174,542 385,096
---------- ---------- ---------- ----------
Other Income (Expense):
Gain on sale of assets held for sale 80,934 80,934
Interest Expense (49,190) (79,846) (20,544) (38,556)
Other (3,630) (8,781) (2,813) (4,535)
---------- ---------- ---------- ----------
Total Other Income (Expense) (52,820) (7,693) (23,357) 37,843
---------- ---------- ---------- ----------
Income Before Income Taxes 325,279 560,028 151,185 422,939
Tax Provision 12,433 -- 6,384
---------- ---------- ---------- ----------
Net Income $ 312,846 $ 560,028 $ 144,801 $ 422,939
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share: (Note 5)
Basic earnings per common share $ 0.12 $ 0.23 $ 0.06 $ 0.18
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per common share $ 0.11 $ 0.21 $ 0.05 $ 0.16
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See notes to Consolidated Financial Statements
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the six months ended
March 31,
-------------------------
1998 1997
---------- ----------
Cash Flows From Operating Activities:
Net Income $ 312,846 $ 560,028
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,829 8,781
Cash provided by (used for) current
assets and liabilities:
Restricted Cash 26,748 86,799
Accounts receivable 84,038 (315,188)
Inventories (13,101) (21,199)
Other assets (160,485) (6,859)
Accounts payable 54,722 294,049
Accrued expenses (147,992) (129,020)
Customer Deposits 20,758 --
Income Taxes Payable (15,567) --
Due to related party (38,000)
---------- ----------
Cash provided by operating activities 168,796 439,391
---------- ----------
Cash flows From Investing Activities -
Purchase of machinery & equipment (3,913) (5,197)
---------- ----------
Cash Flows From Financing Activities:
Repayments - notes payable (135,000) (188,033)
Issuance of Debentures 1,530,000 --
Repayment - Debentures (100,000) --
Repayment - Bank Line of Credit (1,180,000)
---------- ----------
Cash provided by (used for) financing activities 115,000 (188,033)
---------- ----------
Net Increase in Cash 279,883 246,161
Cash at Beginning of Period 406,624 8,094
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Cash at End of Period $ 686,507 $ 254,255
---------- ----------
---------- ----------
See notes to Consolidated Financial Statements
Cash Flow Information - continued
The Company's cash payments for interest and income taxes were as follows:
Six Months Ended
March 31,
------------------------
1998 1997
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Cash paid for interest $ 58,123 $ 79,846
Cash paid for taxes $ 28,000 $ --
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. 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, 1997, 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, 1998, are not necessarily indicative of the results that may be
expected for the year ended September 30, 1998.
2. Restricted Cash
The Restricted Cash is held at the Company's bank as collateral for a
Letter of Credit securing the Company's potential obligations for a
Worker's Compensation insurance policy. The policy expires November 30,
1998.
3. Inventories
Inventories at March 31, 1998 consist of:
Raw materials and supplies $483,439
Work-in-process 331,107
Finished goods 10,690
Reserve for obsolescence (3,818)
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Total $821,418
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4. Commitments and Contingencies
In November 1993, the Company and its Multipress subsidiary were sued in
Indiana Superior Court by an employee of a company that had purchased one
of the Company's presses from a 3rd party. The plaintiff seeks unspecified
monetary damages for a personal injury that occurred in her employer's
facility. Although the Company's subsidiary carries full product liability
insurance, the Company's former management did not notify the
insurance carrier within the prescribed time period. Accordingly, this
claim is not covered by insurance. Based upon consultation with the
Company's counsel, the Company does not believe that the litigation will
have a material adverse affect on the consolidated financial position,
results of operations or cash flows of the Company. The company has
made a provision for the estimated potential loss on this matter.
5. 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:
3 Months Ended 6 Months Ended
March 31 March 31
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Basic:
Average Shares Outstanding 2,554,056 2,395,680 2,554,056 2,395,680
Income From Operations $ 74,542 $ 385,096 $ 378,099 $ 567,721
Basic Earnings
Per Share (FAS 128) $ 0.07 $ 0.16 $ 0.15 $ 0.24
Net Income $ 144,801 $ 422,939 $ 312,846 $ 560,028
Basic Earnings Per Share (FAS 128) $ 0.06 $ 0.18 $ 0.12 $ 0.23
Primary Earnings Per Share,
As Previously Reported N.A. $ 0.17 N.A. $ 0.23
(Note 5 - continued)
3 Months Ended 6 Months Ended
March 31 March 31
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Diluted:
Average Shares Outstanding 2,554,056 2,395,680 2,554,056 2,395,680
Net Effect of Dilutive
Stock options and warrants
based on the treasury stock
method using average market price 278,704 174,737 322,303 190,401
Total Shares 2,832,760 2,570,417 2,876,359 2,586,081
Income From Operations $ 174,542 $ 385,096 $ 378,099 $ 567,721
Diluted Earnings
Per Share (FAS 128) $ 0.06 $ 0.14 $ 0.13 $ 0.21
Net Income $ 144,801 $ 422,939 $ 312,846 $ 560,028
Diluted Earnings
Per Share (FAS 128) $ 0.05 $ 0.16 $ 0.11 $ 0.21
Fully Diluted Earnings Per Share,
As Previously Reported N.A. $ 0.12 N.A. $ 0.16
Average Market Price
of Common Stock $ 1.1841 $ 0.1997 $ 1.1788 $ 0.2193
Ending Market Price
of Common Stock $ 1.0625 $ 0.1875 $ 1.0625 $ 0.1875
The following securities were excluded from the calculation of diluted
earnings per share at March 31, 1998 because they are considered anti-
dilutive under FAS 128:
1. Options granted to an officer and director to purchase 50,000 shares
of the Company's common stock at $2.00 per share.
2. Warrants issued pursuant to the Company's debentures to purchase
465,000 shares of common stock @ $2.00 per share.
6. Private Placement Debt
On November 25, 1997, the Company consummated a private placement offering
of 30 units of Company debentures in the amount of $1,530,000. Each unit
represents: a) a $50,000 interest in a 6% $1,500,000 note payable, b) a
warrant to purchase 10,000 shares of the Company's common stock at $1 per
share during the period November 1, 1997 through September 30, 1999, and c)
a warrant to purchase 15,000 shares of the Company's common stock at $2 per
share during the period October 1, 1999 through September 30, 2001. The
Company incurred expenses of approximately $150,000 in connection with this
offering. The Company utilized the proceeds of the offering to repay the
bank line of credit, a $135,000 note payable and expenses associated with
the offering.
Schedule of required future annual principal payments:
Fiscal Year Ended September 30
------------------------------
1998 $ 100,000
1999 200,000
2000 200,000
2001 900,000
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TOTAL $ 1,400,000
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 as Compared to March 31, 1997
Net Sales for the three months ended March 31, 1998 were $1,709,992 as
compared to $1,753,305 for the three months ended March 31, 1997, a decrease
of $43,313 or 2.4%. Gross profit was $600,116 or 35.0% of sales as compared
to $669,067 or 38.1% of sales for the same period a year earlier. Sales
decreased due to year-end budget constraints of some customers. Gross profit
margins decreased 3.1% due to increases in material and labor costs with no
corresponding price increases on the Company's products.
Selling, general and administrative expenses increased from $283,971 during
the three months ended March 31, 1997 to $425,574 for the three months ended
March 31, 1998. The increase is due to one time payments totaling $65,000
made to the Company's President and former Chief Financial Officer as part of
a previously announced agreement to reprice their 350,000 stock options from
$0.10 to $1.00, increases in wages and benefits of $44,000 to hire additional
staff, continuing legal and investment fees of $11,000 relating to the
Company's private placement, and increased commissions from more sales
generated by outside commissioned reps than by salaried salespersons.
Selling, general and administrative expenses as a percentage of sales were
24.8% during the three months ended March 31, 1998 as compared to 16.2% for
the three months ended March 31, 1997. If the one time payments of $65,000
were eliminated, selling, general and administrative costs would have been
only 21.0% of sales for the three months.
Interest expense of $27,750 was offset by $7,206 of interest revenue for a
net interest expense of $20,544 for the three months ended March 31, 1998 as
compared to $38,556 for the comparable period a year earlier. The decrease
is due primarily to the reduction of the interest rate on the Company's
outstanding indebtedness. The Company currently has $1,600,000 of 6% debt
represented by $1,400,000 first secured debt issued in November 1997 and
$200,000 second secured convertible debt which also bears interest at 6%.
The other $200,000 second secured convertible note is interest free as of
March 1, 1998. The Company is in discussions with the two $200,000
noteholders to consider the possible conversion of all or part of the notes
into common shares of the Company. If done, and as the first secured note is
paid down, interest expense will reduce slightly quarter to quarter, assuming
no new debt is issued.
Net income for the period was $144,801 as compared to $422,939 during the
corresponding period a year earlier. To compare the two periods evenly, one
must make two adjustments, first to add back the one time payments of $65,000
during the three months this year and second, to reduce last year's net
income by $80,934 which represented a one time gain on the sale of an
investment in shares of another public Company. If the corresponding net
incomes are adjusted for these two items, then this year's income would be
$209,801 and last year's would be $342,005 a reduction this year of $132,204.
Net income has reduced by this amount due to reasons aforementioned. The
income tax provision for the period ending March 31 includes a benefit
related to utilization of NOL carry forwards of approximately $28,000,000.
The 1998 provision relates to city income taxes.
Six Months Ended March 31, 1998 as Compared to March 31, 1997
Net Sales for the six months ended March 31, 1998 were $3,441,407 as compared
to $3,133,942 for the six months ended March 31, 1997, an increase of
$307,465 or 9.8%. Gross profit was $1,195,995 or 34.8% of sales as compared
to $1,179,545 or 37.6% of sales for the same period a year earlier. Sales
increased due to improved marketing efforts and the continued strength of the
machine tool industry. Gross profit margins decreased 2.8% due to increases
in material and labor costs with no corresponding price increases on the
Company's products.
Selling, general and administrative expenses increased from $611,824 during
the six months ended March 31, 1997 to $817,896 for the six months ended
March 31, 1998. The increase is due to one time payments totaling $85,000
($65,000 in the second quarter) made to the Company's President and former
Chief Financial Officer as part of a previously announced agreement to
reprice their 350,000 stock options from $0.10 to $1.00 and an increase of
approximately $100,000 in commissions paid to outside manufacturers
representatives compared to the same period last year as more sales were made
by outside commissioned reps than by salaried salespersons. Selling general
and administrative expenses as a percentage of sales were 23.7% during the
six months ended March 31, 1998 as compared to 19.5% for the six months ended
March 31, 1997. If the one time payments of $85,000 were eliminated,
selling, general and administrative costs would have been only 21.3% of sales
for the six months.
Interest expense of $61,798 was offset by $12,608 of interest revenue for a
net interest expense of $49,190 for the six months ended March 31, 1998 as
compared to $79,846 for the comparable period a year earlier. The decrease
is due primarily to the reduction of the interest rate on the Company's
outstanding indebtedness. The Company currently has $1,600,000 of 6% debt
represented by $1,400,000 first secured debt issued in November 1997 and
$200,000 second secured convertible debt which also bears interest at 6%.
The other $200,000 second secured convertible note is interest free as of
March 1, 1998. The Company is in discussions with the two $200,000
noteholders to consider the possible conversion of all or part of the notes
into common shares of the Company. If done, and as the first secured note is
paid down, interest expense will reduce slightly quarter to quarter, assuming
no new debt is issued.
Net income for the period was $312,846 as compared to $560,028 during the
corresponding period a year earlier. To compare the two periods evenly, one
must make two adjustments, first to add back the one time payments of $85,000
during the six months this year and second, to reduce last year's net income
by $80,934 which represented a one time gain on the sale of an investment in
shares of another public Company. If the corresponding net incomes are
adjusted for these two items, then this year's income would be $397,846 and
last year's was $479,094 a reduction this year of $81,248.
At the upcoming annual meeting on May 22, 1998, Jonathan Reuben will be
resigning as an officer and Director of the Company. Mr. Reuben and the
Company have agreed on certain payments being paid to Mr. Reuben in accordance
with his existing contract and other matters between now and the end of the
fiscal year. The Company has paid Mr. Reuben in the third quarter $26,750 to
buyback his 225,000 outstanding stock options and the remainder of his
contract of approximately $75,000 which was due over the next 2 1/2 years
will be paid by the end of this fiscal year. These will have a negative
impact on expected income over the final six months of the fiscal year of
approximately $100,000. Despite the increase in sales, net income has reduced
by this amount due to reasons aforementioned. The income tax provision for
the period ending March 31 includes a benefit related to utilization of NOL
carry forwards of approximately $28,000,000. The 1998 provision relates to
city income taxes.
Liquidity and Capital Resources
As of March 31, 1998, the Company had a working capital surplus of $1,091,903
as compared to a working capital deficiency of $889,728 at March 31, 1997 and
a working capital deficiency of $459,977 at September 30, 1997. The change
from a working capital deficit to a working capital surplus is due to the
profitable operations of the Company and more importantly, the refinancing of
the Company's outstanding bank indebtedness. At September 30, 1997 and in
previous quarters, the Company's bank indebtedness had been due on demand and
accordingly shown in current liabilities, thereby increasing the Company's
working capital deficiency. On November 25, 1997, the Company completed a
$1,530,000 financing consisting primarily of a $1,500,000 three year loan.
This loan, except for the current portion of $200,000, is disclosed in long
term liabilities and accordingly results in a better working capital balance.
This surplus should continue to increase as the Company anticipates
profitable operations at least through the foreseeable future. The Company's
major source of liquidity continues to be from available cash on hand which
is generated from profitable cash flow from operations. The Company has no
material commitments at this time other than its quarterly payments of
$50,000 on the long-term note payable.
The Company is currently investigating various accounting and inventory
computer systems which could lead to a one time material expenditure not to
exceed $175,000. No decisions have been made, but it is expected that the
new system will be purchased and installed prior to September 30, 1998.
The Company's overall financial condition continues to improve despite the
slight reduction in sales and income, particularly now that the Company has
secured long term financing.
PART II
Item 1. Legal Proceedings
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
Consumer Products; (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.
The Company is a defendant in a case in Porter Superior Court, in Indiana
captioned Jackson v. Multipress et. al. No. 64D02-9311-CT-2675. The
plaintiff alleges she injured her hand while using a Multipress machine. Due
to a decision made by the Company's management at the time the case began
(prior to March 1995) not to seek insurance coverage, the Company could be
responsible for the entire amount of any judgment or settlement.
Various other 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 business and are routine litigation
incidental to such business. None of the litigation matters currently
pending is deemed to be material by management of the Company.
Item 2. Changes in Securities and Use of Proceeds
On November 25, 1997, the Company consummated a private placement offering of
30 Units at a purchase price of $51,000 per Unit for total proceeds of
$1,530,000. These Units were sold through Eastlake Securities, Inc. an NASD
member firm as "Placement Agent." The Placement Agent's fee was $75,000.
The Units were sold to accredited investors and the Company believes the
sales were exempt from registration under the Securities Act of 1993 under
Section 4(2) of that Act and Rules 505 and 506 of Regulation D under that
Act. The Units were sold to less than 30 accredited investors without any
public solicitation.
Item 2. Changes in Securities and Use of Proceeds - continued
Each of the 30 Units consisted of (1) $50,000 beneficial interest in a 6%
Secured Note in the principal amount of $1,500,000 issued jointly and
severally by the Company and its wholly-owned subsidiary. QPI Multipress,
Inc. to the order of Eastlake Securities, Inc. as agent for the lenders
pursuant to a credit agreement, (2) a Series A Common Stock Purchase Warrant
to purchase ten thousand (10,000) shares of the Company's common stock at
$1.00 per share during the period November 1, 1997 to September 30, 1999, and
(3) a Series B Common Stock Purchase Warrant to purchase fifteen thousand
(15,000) shares of Common Stock at $2.00 per share during the period October
1, 1999 to September 30, 2001. The 6% Secured Note is secured by all of the
assets of the Company and its subsidiary.
The proceeds of the offering totaled $1,533,762.15 including interest of
$3,762.15. The expenses of the offering totaled $135,363.31 including the
$75,000 placement fee to Eastlake Securities, Inc., leaving net proceeds of
$1,398,398.84. Of that amount, $1,160,785.96 was used to pay off a short
term debt of that amount to Provident Bank and $237,612.88 was used to pay a
short term debt to Eastlake Securities.
Item 4. Submission of Matters to a Vote of Security Holders
The company has submitted the following issues for shareholder vote at an
annual meeting to be held on May 22, 1998 at the Company's offices in
Columbus, Ohio.
1. Amend the Company's bylaws to set the number of directors at not less than
three nor more than seven and to permit the Board to determine the exact
number.
2. To elect nominees to the Company's Board.
3. To approve the 1997 Stock Option Plan and to grant options to purchase
150,000 shares of common stock to certain employees.
4. To ratify the grant of options to purchase 225,000 shares each to Messrs.
Weaver and Reuben.
5. Appoint Farber & Hass LLP as independent auditors for fiscal year 1998.
Item 6. Exhibits and Reports of Form 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
c. Not applicable
Statements in this Form 10-QSB that are not historical facts, including
statements about the Company's prospects, about the future impact of
litigation, 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 the Company's 1997 Form 10-KSB under
"Risk Factors."
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: May 11, 1998 By /s/ Bruce C. Weaver
------------------------------------
Bruce C. Weaver
President (Principal Executive
Officer)
By /s/ Jonathon Reuben
--------------------------------------
Jonathon Reuben
Principal Financial and
Accounting Officer