U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended June 30, 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 ---- ---- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: August 10, 1999, 2,554,056 shares of common stock outstanding. Transitional Small Business Disclosure Format (check one): Yes No X ---- ---- 1 QUALITY PRODUCTS, INC. CONSOLIDATED BALANCE SHEET June 30, 1999 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 396,676 Trade accounts receivable, less allowance for doubtful accounts of $ 11,867 731,115 Inventories 703,781 Other Current Assets 88,223 ---------- Total Current Assets 1,919,795 Property and Equipment 1,029,763 Less Accumulated Depreciation (854,163) ---------- Property and Equipment, net 175,600 Other Assets 29,269 TOTAL ASSETS $2,124,664 ---------- ---------- See notes to Consolidated Financial Statements 2 QUALITY PRODUCTS, INC. CONSOLIDATED BALANCE SHEET - CONTINUED June 30, 1999 (Unaudited) LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 333,455 Accrued expenses 227,461 Customer deposits 71,392 Note payable, current 166,550 Note payable, related parties, current 80,000 ------------ Total Current Liabilities $ 878,858 ------------ NON-CURRENT LIABILITIES: Notes payable, non-current $ 635,991 Notes payable, related parties, non-current 780,000 ------------ Total non-current liabilities $ 1,415,991 ------------ TOTAL LIABILITIES $ 2,294,849 ------------ 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 (25,197,522) Less: Treasury stock, 176,775 shares at cost (5,025,972) ------------ Total stockholders' deficit ($ 170,185) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,124,664 ------------ ------------ See notes to Consolidated Financial Statements 3 QUALITY PRODUCTS, INC. CONSOLIDATED STATEMENT OF INCOME (Unaudited) For the nine months ended For the three months ended June 30, June 30, 1999 1998 1999 1998 ---------- ---------- ----------- ----------- Net Sales $ 4,883,718 $ 4,883,401 $ 1,212,535 $ 1,441,994 Cost of Goods Sold 3,264,390 3,216,659 846,108 971,247 ----------- ----------- ----------- ----------- Gross Profit 1,619,328 1,666,742 366,427 470,747 Selling, General, & Admin Expenses 1,241,621 1,337,772 401,130 519,876 Operating Income (Loss) 377,707 328,970 (34,703) (49,129) Other Income (Expense): Interest Expense (73,689) (86,473) (23,639) (24,675) Interest Income 16,742 20,376 4,374 7,768 Other Income(Expense) 4,582 105,194 3,382 108,824 ----------- ----------- ----------- ----------- Total Other Income (Expense) (52,365) 39,097 (15,883) 91,917 Income Before Income Taxes 325,342 368,067 (50,586) 42,788 Income Taxes 767 36,847 4,500 24,414 ----------- ----------- ----------- ----------- Net Income (Loss) $ 324,575 $ 331,220 (55,086) $ 18,374 Earnings per share: Basic earnings (loss) per common share(Note 3) $ 0.13 $ 0.13 $ (0.02) $ 0.01 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted earnings(loss) per common share(Note 3) $ 0.13 $ 0.12 $ (0.02) $ 0.01 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- See notes to Consolidated Financial Statements 4 QUALITY PRODUCTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the nine months ended June 30, 1999 1998 (unaudited) (unaudited) Cash Flows From Operating Activities: Net Income $ 324,575 $ 331,220 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 31,389 9,829 Changes in operating assets and liabilities: Restricted Cash 15,662 26,661 Accounts receivable (104,484) (47,802) Inventories 22,259 (97,071) Other assets 23,207 (131,203) Accounts payable (109,695) 106,355 Accrued expenses (3,912) (261,130) Customer Deposits (288,115) 164,980 Income Taxes Payable (2,000) (23,840) ---------- --------- Cash provided by (used for) operating activities (91,114) 77,999 Cash Flows Used by Investing Activities : Purchase of machinery & equipment (40,985) (3,913) Cash Flows From Financing Activities: Bank Borrowings 39,805 -- Principal Repayment-Bank Note (30,555) -- Principal Repayments - Notes Payable -- (135,000) Issuance of Debentures -- 1,530,000 Principal Repayment - Debentures (150,000) (150,000) Principal Repayment - Bank Line of Credit -- (1,180,000) ---------- --------- Cash provided by (used for) financing activities (140,750) 65,000 Net Increase (Decrease) in Cash (272,849) 139,086 Cash at Beginning of Period 669,525 406,624 ---------- --------- Cash at End of Period $ 396,676 $ 545,710 ---------- --------- ---------- --------- See notes to Consolidated Financial Statements 5 Cash Flow Information - continued The Company's cash payments for interest and income taxes were as follows: Nine Months Ended June 30, 1999 1998 ---- ---- Cash paid for interest $ 73,688 $ 88,380 Cash paid for taxes $ 13,567 $ 66,989 Supplemental Disclosure of Non-cash Investing Activities: In the nine months ended June 30, 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 nine months ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ended September 30, 1999. 2. Inventories Inventories at June 30, 1999 consist of: Raw materials and supplies $ 524,693 Work-in-process 149,674 Finished goods 33,232 Reserve for obsolescence (3,818) --------- Total $ 703,781 --------- --------- 7 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 9 Months Ended June 30 June 30 1999 1998 1999 1998 ------- -------- ------- ------- BASIC: Average Shares Outstanding 2,554,056 2,554,056 2,554,056 2,554,056 Net Income (Loss) $ (55,086) $ 18,374 $ 324,575 $ 331,220 Basic Earnings (Loss) Per Share $ (0.02) $ 0.01 $ 0.13 $ 0.13 8 Note 3 - continued 3 Months Ended 9 Months Ended June 30, June 30, 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 0 240,020 0 297,453 Total Shares 2,554,056 2,794,076 2,554,056 2,851,509 Net Income (Loss) $ (55,086) $ 18,374 $ 324,575 $ 331,220 Diluted Earnings (Loss) Per Share $ (0.02) $ 0.01 $ 0.13 $ 0.12 Average Market Price of Common Stock $ 0.4932 $ 1.1288 $ 0.4901 $ 1.2129 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 June 30, 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 June 30, 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. $1,150,000 remains outstanding at June 30, 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. $112,541 was outstanding under this agreement at June 30, 1999. Maturities of notes payable for the 5 years succeeding June 30, 1999 are: 2000 $ 246,550 2001 1,000,465 2002 415,526 ---------- Total $1,662,541 ---------- ---------- 10 5. Income Taxes The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at June 30, 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 increased approximately $22,000 in the period ended June 30, 1999 and decreased approximately $(18,000)in the period ended June 30, 1998. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At June 30, 1999, the Company had net operating loss carryforwards for Federal and State income tax purposes of approximately $28,635,000 and $29,483,000, 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 June 30, 1999 as Compared to June 30, 1998 Net Sales for the three months ended June 30, 1999 were $1,212,535 as compared to $1,441,994 for the three months ended June 30, 1998, a decrease of $229,459 or 15.9%. Gross profit was $366,427 or 30.2% of sales as compared to $470,747 or 32.6% of sales for the same period a year earlier. Sales decreased due to a slowdown in new orders during the prior period ending March 31, when the Company's backlog was $723,000. However, new orders have increased and the backlog is now at $1.3 million. The Company expects sales for the three months ending September 30, 1999 to increase to approximately $1.4 million. Selling, general and administrative expenses decreased from $519,876 during the three months ended June 30, 1998 to $401,130 for the three months ended June 30, 1999. The decrease is due primarily to the discontinuance of expenses related to the buyout of the employment contract of the Company's former Chief Financial Officer, which were included in the same period last year. Selling, general and administrative expenses as a percentage of sales decreased to 33.1% during the three months ended June 30, 1999 as compared to 36.1% for the three months ended June 30, 1998. The percentage is expected to remain constant in the next period. Interest expense of $23,639 was offset by $4,374 of interest revenue for a net interest expense of $19,265 for the three months ended June 30, 1999 as compared to $16,907 for the comparable period a year earlier. The increase is due primarily to the addition of the Company's computer equipment loan. The Company currently has $1,350,000 of 6% debt represented by $1,150,000 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 $112,541 outstanding on this loan. Net loss for the period was $(55,086) as compared to net income of $18,374 during the corresponding period a year earlier, a decrease of $73,460 or 399.8%. The decrease is primarily due to the decrease in sales. However, the comparable period last year included $108,824 of other income relating to a refund of worker's compensation premiums and a reversal of expenses previously estimated which were never realized. Comparing the two periods on an operating basis demonstrates both periods are similar. Operating loss for the current period is $(34,704) and for the comparable period last year was $(49,129). 12 The income tax provision for the period ending June 30, 1999 includes no benefit related to utilization of NOL carry forwards as the Company has made a full valuation allowance against the Company's deferred tax asset. The period ending June 30, 1998 includes a benefit of approximately $12,000 related to utilization of NOL carryforwards. The 1999 provision relates to city income taxes. 13 Nine Months Ended June 30, 1999 as Compared to June 30, 1998 Net Sales for the nine months ended June 30, 1999 were $4,883,718 as compared to $4,883,401 for the nine months ended June 30, 1998, an increase of $317. Gross profit was $1,619,328 or 33.2% of sales as compared to $1,666,742 or 34.1% of sales for the same period a year earlier. Sales remained steady even though the Company experienced a slowdown in new orders in the period ending March 31, 1999. Sales are expected to increase slightly in the three months ending September 30, 1999 to approximately $1.4 million. Selling, general and administrative expenses decreased from $1,337,772 during the nine months ended June 30, 1998 to $1,241,621 for the nine months ended June 30, 1999. Selling general and administrative expenses as a percentage of sales decreased to 25.4% during the nine months ended June 30, 1999 as compared to 27.3% for the nine months ended June 30, 1998. The decrease is due to the elimination of one-time charges relating to the repricing of executive stock options and the buyout of the employment contract of the Company's former Chief Financial Officer, occurring in the same period last year. Selling, general, and administrative expenses as a percentage of sales is expected to remain constant in the next period. Interest expense of $73,689 was offset by $16,742 of interest revenue for a net interest expense of $56,947 for the nine months ended June 30, 1999 as compared to $66,097 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 $1,350,000 of 6% debt represented by $1,150,000 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 $112,541 outstanding on this loan. Net income for the period was $324,575 as compared to $331,220 during the corresponding period a year earlier. The decrease of $6,645 is primarily due to the $105,194 of other income included in the comparable period last year. The income tax provision for the period ending June 30, 1999 and 1998 includes a benefit related to utilization of NOL carry forwards of approximately $140,000 and 158,000, respectively. The 1999 provision relates to city income taxes. 14 Liquidity and Capital Resources As of June 30, 1999, the Company had a working capital surplus of $1,040,937 as compared to a working capital surplus of $1,059,277 at June 30, 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. On June 1, the Company activated new hardware and software systems and is operating all aspects of business on this new system. 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. 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: August 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