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, 1999
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) 228-0185
(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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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: May 7, 1999, 2,554,056
shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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1
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1999
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 668,922
Trade accounts receivable, less
allowance for doubtful accounts of $ 11,867 824,620
Inventories 635,301
Other Current Assets 107,430
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Total Current Assets 2,236,273
Property and Equipment 1,027,628
Less Accumulated Depreciation (842,382)
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Property and Equipment, net 185,246
Other Assets 40,245
TOTAL ASSETS $2,461,764
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-----------
See notes to Consolidated Financial Statements
2
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
March 31, 1999
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 556,648
Accrued expenses 202,362
Customer deposits 93,641
Note payable, current 165,616
Note payable, related parties, current 80,000
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Total Current Liabilities $ 1,098,267
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NON-CURRENT LIABILITIES:
Notes payable, non-current $ 678,597
Notes payable, related parties, non-current 800,000
------------
Total non-current liabilities $ 1,478,597
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TOTAL LIABILITIES $ 2,576,864
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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; 1,733,333 shares reserved
Additional paid-in capital 30,053,284
Accumulated deficit (25,142,437)
Less: Treasury stock, 176,775 shares at cost (5,025,972)
Total stockholders' deficit $ (115,100)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,461,764
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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,
1999 1998 1999 1998
----------- ---------- ---------- ----------
Net Sales $3,671,183 $3,441,407 $2,047,142 $1,709,992
Cost of Goods Sold 2,418,283 2,245,412 1,347,009 1,109,876
---------- ---------- ---------- ----------
Gross Profit 1,252,900 1,195,995 700,133 600,116
Selling, General, & Admin Expenses 840,491 817,896 484,756 425,574
---------- ---------- ---------- ----------
Operating Income 412,409 378,099 215,377 174,542
Other Income (Expense):
Interest Expense (50,050) (61,798) (24,396) (27,750)
Interest Income 12,368 12,608 5,992 7,206
Other Income(Expense) 1,200 (3,630) 961 (2,813)
---------- ---------- ---------- ----------
Total Other Income (Expense) (36,482) (52,820) (17,443) (23,357)
Income Before Income Taxes 375,927 325,279 197,934 151,185
Income Taxes (3,733) 12,433 (8,283) 6,384
---------- ---------- ---------- ----------
Net Income $ 379,660 $ 312,846 $ 206,217 $ 144,801
Earnings per share:
Basic earnings per common share(Note 3) $ 0.15 $ 0.12 $ 0.08 $ 0.06
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per common share(Note 3) $ 0.15 $ 0.11 $ 0.08 $ 0.05
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See notes to Consolidated Financial Statements
4
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended
March 31,
-----------------------------------
1999 1998
(unaudited) (unaudited)
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Cash Flows From Operating Activities:
Net Income $ 379,660 $ 312,846
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,607 6,829
Changes in operating assets and liabilities:
Restricted Cash 15,662 26,748
Accounts receivable (197,989) 84,038
Inventories 90,739 (13,101)
Other assets (6,975) 160,485)
Accounts payable 113,498 54,722
Accrued expenses (29,011) (147,992)
Customer Deposits (265,866) 20,758
Income Taxes Payable (2,000) (15,567)
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Cash provided by operating activities 117,325 168,796
Cash Flows Used by Investing Activities:
Purchase of machinery & equipment (38,850) (3,913)
Cash Flows From Financing Activities:
Bank Borrowings 39,805 -
Principal Repayment - Bank Note (18,883) -
Principal Repayments - Notes Payable - (135,000)
Issuance of Debentures - 1,530,000
Principal Repayment - Debentures (100,000) (100,000)
Principal Repayment - Bank Line of Credit - (1,180,000)
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Cash provided by (used for) financing activities (79,078) 115,000
Net Increase (Decrease) in Cash (603) 279,883
Cash at Beginning of Period 669,525 406,624
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Cash at End of Period $ 668,922 $ 686,507
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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,
-----------------------------
1999 1998
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Cash paid for interest $ 50,050 $ 58,123
Cash paid for taxes $ 9,067 $ 28,000
Supplemental Disclosure of Non-cash Investing Activities:
In the period ended March 31, 1999 the Company acquired computer hardware and
software in exchange for a note payable in the amount of $15,005.
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, 1998,
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, 1999, are not necessarily indicative of the results
that may be expected for the year ended September 30, 1999.
2. Inventories
Inventories at March 31, 1999 consist of:
Raw materials and supplies $478,283
Work-in-process 121,908
Finished goods 38,928
Reserve for obsolescence (3,818)
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Total $635,301
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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:
3 Months Ended 6 Months Ended
March 31 March 31
--------------------- -----------------------
1999 1998 1999 1998
BASIC:
Average Shares Outstanding 2,554,056 2,554,056 2,554,056 2,554,056
Net Income $ 206,217 $ 144,801 $ 379,660 $ 312,846
Basic Earnings Per Share $ 0.08 $ 0.06 $ 0.15 $ 0.12
8
Note 3 - continued
3 Months Ended 6 Months Ended
March 31, March 31
------------------------- ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
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 0 278,704 0 322,303
Total Shares 2,554,056 2,832,760 2,554,056 2,876,359
Net Income $ 206,217 $ 144,801 $ 379,660 $ 312,846
Diluted Earnings Per Share $ 0.08 $ 0.05 $ 0.15 $ 0.11
Average Market Price
of Common Stock $ 0.6212 $ 1.1841 $ 0.4873 $ 1.1788
Ending Market Price
of Common Stock $ 0.5625 $ 1.0625 $ 0.5625 $ 1.0625
The following securities were excluded from the calculation of diluted
earnings per share at March 31, 1999 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) Options granted to holders of a convertible note to purchase 533,333
shares of common stock at $0.75 per share.
9
4. Notes Payable
In August 1996, the Company entered into a note payable in the amount of
$500,000 with a former shareholder in connection with the settlement of certain
litigation. The note was convertible, upon demand, into 500,000 to 666,666
shares of common stock of the Company at a price of $0.75 to $1.00 per share.
The Company was required to make quarterly interest only payments at 6% per
annum. The agreement contains certain acceleration clauses. The principal
amount of the note and unpaid interest are payable in full in August 2001.
In August 1997, the note was purchased by two individuals (including a current
member of the Board of Directors of the Company and a former Company officer)
who immediately converted $100,000 ($50,000 each) into 133,332 common shares
(66,666 each). The remaining notes totaling $400,000, convertible at $0.75 per
share and bearing interest at 6%, remain outstanding at March 31, 1999.
In April 1998, one of the note holders entered into an agreement with the
Company to forebear and forgive all remaining interest payments for the
remaining life of the note.
In November 1997, the Company initiated and consummated a private placement
offering of 30 units of Company debentures in the amount of $1,530,000.
$1,200,000 remains outstanding at March 31, 1999. 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.
In August 1998, the Company entered into an agreement with a local bank to
borrow up to $150,000 to replace the Company's computer information systems.
$124,212 was outstanding under this agreement at March 31, 1999.
Maturities of notes payable for the 5 years succeeding March 31, 1999 are:
2000 $ 245,616
2001 1,049,453
2002 429,144
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Total $1,724,213
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5. Income Taxes
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at March 31, 1999 and 1998 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 $(85,000) and $(65,000) in the
period ended March 31, 1999 and 1998, respectively, representing primarily net
taxable income in those periods. 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, 1999, the Company had net operating loss carryforwards for Federal
and State income tax purposes of approximately $28,618,000 and $29,478,000,
respectively, which is available to offset future taxable income, if any,
through 2010.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 as Compared to March 31, 1998
Net Sales for the three months ended March 31, 1999 were $2,047,142 as compared
to $1,709,992 for the three months ended March 31, 1998, an increase of $337,150
or 19.7%. Gross profit was $700,133 or 34.2% of sales as compared to $600,116
or 35.0% of sales for the same period a year earlier. Sales increased due to
one large order valued at $318,000 which the Company completed and shipped
during the quarter. Unfortunately, the Company experienced a slowdown in new
orders during the period and consequently the backlog decreased to $723,000 from
$1.4 million at December 31, 1998. The slowdown appears to be an industry-wide
trend and not specific to the Company. Consequently, the Company expects sales
for the three months ending June 30,1999 to decrease to approximately $1.2
million. However, quoting activity remains high and available capacity in the
engineering and production departments should allow the Company to meet most
delivery requests.
Selling, general and administrative expenses increased from $425,574 during the
three months ended March 31, 1998 to $484,756 for the three months ended March
31, 1999. The increase includes 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. Additionally, the
Company incurred $22,500 in consulting and education expenses relating to the
implementation of the Company's new computer system. These expenses are
expected to decrease as the Company approaches the activation date for the
computer system. The Company also incurred $10,000 in additional advertising
fees and $15,000 in additional commissions to support the increased sales.
Selling, general and administrative expenses as a percentage of sales decreased
to 23.7% during the three months ended March 31, 1999 as compared to 24.8% for
the three months ended March 31, 1998. The decrease is due to the increased
sales in the current period, and the percentage is expected to increase in the
next period as sales decrease.
Interest expense of $24,396 was offset by $5,992 of interest revenue for a net
interest expense of $18,404 for the three months ended March 31, 1999 as
compared to $20,544 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 $1,200,000 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 interest
free as of March 1, 1998. In August 1998, QPI Multipress, Inc. entered into a
loan agreement with a local bank to finance computer equipment. The agreement
allowed Multipress to borrow up to $150,000 at 8.04% interest and to repay the
loan over 39 months. Currently, there is $124,212 outstanding on this loan.
12
Net income for the period was $206,217 as compared to $144,801 during the
corresponding period a year earlier, an increase of $61,416 or 42.4%. The
increase is due to the increase in sales. Income is expected to decrease in the
next period in relation to the slowing sales trend.
The income tax provision for the period ending March 31, 1999 and 1998 includes
a benefit related to utilization of NOL carry forwards of approximately $85,000
and $65,000, respectively. The 1999 provision relates to city income taxes.
13
Six Months Ended March 31, 1999 as Compared to March 31, 1998
Net Sales for the six months ended March 31, 1999 were $3,671,183 as compared
to $3,441,407 for the six months ended March 31, 1998, an increase of
$229,776 or 6.7%. Gross profit was $1,252,900 or 34.1% of sales as compared
to $1,195,995 or 34.8% of sales for the same period a year earlier. Sales
increased due to one large order valued at $318,000 which the company
completed and shipped in the second quarter. Unfortunately, the Company
experienced a slowdown in new orders, therefore, sales are expected to
decrease in the three months ending June 30, 1999 to approximately $1.2
million.
Selling, general and administrative expenses increased from $817,896 during
the six months ended March 31, 1998 to $818,724 for the six months ended
March 31, 1999. Selling general and administrative expenses as a percentage
of sales decreased to 22.3% during the six months ended March 31, 1999 as
compared to 23.7% for the six months ended March 31, 1998. The decrease is
due to the increased sales for the six months, and the percentage is expected
to increase in the next period as sales decrease.
Interest expense of $50,050 was offset by $12,368 of interest revenue for a
net interest expense of $37,682 for the six months ended March 31, 1999 as
compared to $49,190 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 $1,200,000
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 interest free as of March 1, 1998. In August 1998, QPI Multipress,
Inc. entered into a loan agreement with a local bank to finance computer
equipment. The agreement allowed Multipress to borrow up to $150,000 at
8.04% interest and to repay the loan over 39 months. Currently, there is
$124,212 outstanding on this loan.
Net income for the period was $379,660 as compared to $312,846 during the
corresponding period a year earlier. The increase of $66,814 is primarily
due to the increase in sales. Income is expected to decrease in the next
period in relation to the slowing sales trend.
The income tax provision for the period ending March 31, 1999 and 1998
includes a benefit related to utilization of NOL carry forwards of
approximately $85,000 and 65,000, respectively. The 1999 provision relates
to city income taxes.
14
Liquidity and Capital Resources
As of March 31, 1999, the Company had a working capital surplus of $1,138,006
as compared to a working capital surplus of $1,091,903 at March 31, 1998 and
a working capital surplus of $895,155 at September 30, 1998. This surplus
should continue to 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
The Company utilizes a number of computer programs in its operations. Any of
the Company's programs that recognize a date using "00" as the year 1900
rather than the year 2000 could result in errors or system failures. The
Company is currently implementing and testing new hardware and software
systems and expects them to be fully functional by June 1. Financing for the
system is provided under a three-year term loan from a local bank. The
software and hardware is certified year 2000 compliant. The Company believes
that this purchase will materially reduce the exposure of the Company to
future year 2000 compliance expenses. In the event the Company is unable to
fully implement the software and hardware before January 1, 2000 the
Company's accounting and information systems will fail resulting in a
material financial risk to the Company.
The Company is unaware of any supplier or customer who would pose a material
risk to the Company in the event the supplier or customer is not compliant by
January 1, 2000. The Company is not dependent on any one supplier or
customer and the Company has alternate suppliers and customers available in
the event of failure.
Many of the Company's products contain programmable logic controls (PLC's)
operated by computer hardware and software. The Company's suppliers have
stated all PLC's are year 2000 compliant, and it is unlikely the Company will
be required to replace any existing components.
In the event of complete failure in all year 2000 areas, the Company could
continue to operate at a significantly reduced level of efficiency resulting
in materially increased costs to the Company. The Company is capable of
switching suppliers and transaction processing could be performed manually to
achieve continuing operations.
15
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 1998 Form 10-KSB under "Risk Factors."
16
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized:
QUALITY PRODUCTS, INC.
----------------------
Registrant
Date: May 11, 1999
By /s/ Bruce C. Weaver
------------------------------
Bruce C. Weaver
President (Principal Executive
Officer)
By /s/ Tac D. Kensler
----------------------------
Tac D. Kensler
Chief Financial Officer
17